# hw_01_sol - and exports 40 to Europe. Price of a Boeing in...

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Homework 1 Exercise 1 . Solve the Ricardian trade model studied in class with the following parameters: L = 4 , L * = 8 , a 1 = 2 , a 2 = 1 , a * 1 = 2 , a * 2 = 4. a) Find the relative price of goods p 2 /p 1 . b) Find the relative quantity of goods produced. c) Find the relative wage. d) What happens when foreign economy experiences technological progress: a * 1 decreases to 1? Solution. a) First, domestic economy will produce good 2 and foreign economy will produce good 2 because: 0 . 5 = a 2 /a 1 < a * 2 /a * 1 = 2 . 0 . Then the relative quantity produced is Q 2 Q 1 = L/a 2 L * /a * 1 = 1 . So, relative price is p 2 p 1 = 1 Q 2 /Q 1 = 1 . b) Relative quantity is Q 2 /Q 1 = 1. c) Relative wage is w w * = p 2 /a 2 p 1 /a * 1 = 2 . d) When the foreign economy experiences technological progress we get 0 . 5 = a 2 /a 1 < a * 2 /a * 1 = 4 . 0 . So, production location of each good does not change. Relative price and quantity become: Q 2 Q 1 = 0 . 5 , p 2 p 1 = 2 . 0 . Relative wage does not change because good prices o±set productivity gains. 1

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Exercise 2 . The U.S. produces 100 Boeings, sells 60 of them domestically
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Unformatted text preview: and exports 40 to Europe. Price of a Boeing in the U.S. is 15 mln \$ and 10 mln e in Europe. European company, Mercedes-Benz, owns a plant in the U.S. that produces 20,000 SUVs and sells all of them in the U.S. The price of a Mercedes-Benz SUV is 50 tsnd \$. Investment and government purchases are zero. Compute GDP, GNP and CA for both economies. Solution. First we have to come up with the euro/dollar exchange rate. We can use Boeing’s foreign and domestic price to get a 1.5 euro/dollar exchange rate. We use this number to construct NIA. Table 1: National Income Accounts for the U.S. and Japan spending \ Country U.S., bln \$ Europe, bln euro Europe, bln \$ Consumption 1.90 0.40 0.60 Investment 0.00 0.00 0.00 Government 0.00 0.00 0.00 Current Account 0.60-0.40-0.60 GDP 2.50 0.00 0.00 GNP 1.50 0.67 1.00 2...
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## This note was uploaded on 03/30/2009 for the course PAM 2040 taught by Professor Lewis during the Fall '07 term at Cornell University (Engineering School).

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hw_01_sol - and exports 40 to Europe. Price of a Boeing in...

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