International trade theory
questions:
Problem 1. (6 points)
Assume a Ricardian model with two
countries, Home and Foreign, that both produce textiles and coffee. Home has
2000 units of labor available. Home’s unit labor requirement in the production
of textiles is aLT
= 4, while in the production of coffee it is aLC = 2. Foreign has 1000 units
of labor available. Foreign’s unit labor requirement in the production of
textiles is a∗LT = 1, while in the production of coffee it is a∗LC = 2.
a) What is the main reason for trade
in the Ricardian model? (1 pt)
b) Assume that there is no trade and
both countries produce textiles and coffee.
1. b1) Without trade, the relative price of
textiles in terms of coffee equals the opportunity cost (again textiles in terms
of coffee). Explain why this is the case. (0.5
pts)
2.
b2) What are the prices of
textiles in terms of coffee in both countries? (0.5
pts)
c) Assume that both countries open
for trade. In equilibrium, the price of textiles is denoted by PTt , while the
price of coffee is denoted by PCt .
1.
c1) Graph the relative supply
curve (RS). Label the axes and all relevant points. (1.5
pts)
2.
c2) Assume that, with free
trade, the price of textiles in terms of coffee is PTt /PCt = 1. Calculate the output that is produced
by both countries and describe the pattern of trade. (1.5
pts)
3. c3) Now assume that, with free trade, the price
of textiles in terms of coffee is PTt /PCt = 0.5. Determine the output that is produced by
both countries. (1 pt)
Problem 2. (4 points)
Assume that the US and China both
produce cars and steel using labor and capital as input factors in the
production. The car industry is capital intensive, while the steel industry is
labor intensive. The US imports steel from China and exports cars to China.
China imports cars from the US and exports steel to the US.
a) What is the main difference
between the specific factors model and the Heckscher-Ohlin model? (1 pt)
b) Assume that the US trade policy
leads to an increase in the price of steel but does not affect the price of
cars.
1.
b1) Base your argumentation on
the specific factors model and assume that labor is mobile, while capital is
industry specific. What are the effects of the trade policy on the Chinese
workers? Explain your result. (1.5 pts)
2.
b2) Base you argumentation on
the Heckscher-Ohlin model. What are the effects of the trade policy on the
Chinese workers? Explain your result. (1.5 pts)
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