PS03a-SFM - Econ 441 Problem Set 3 - Answers Alan Deardorff...

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Econ 441 Alan Deardorff Problem Set 3 - Answers Specific Factors Model Page 1 of 8 Problem Set 3 - Answers Specific Factors Model 1. By now you have seen four 2-good models in this course: The Ricardian Model (RM), Heckscher-Ohlin Model (HO), the Extreme Specific Factors Model (XSF), and the (Standard) Specific Factors Model (SFM). Determine the validity of each of the statements below for each of these models. Since answers may depend on whether a country is specialized or diversified, you should assume in all models except RM that in any trading equilibrium the country or countries are diversified (producing two goods) and that any changes are small enough that the pattern of specialization does not change. In RM, assume that countries are producing only one good with trade. Assume also that relative prices with trade are always strictly different from relative prices in autarky. Autarky vs. Trade: a. A country will export the good for which its autarky relative price was lower than the world price, and it will gain by doing so. True in all models, as illustrated here. (For this purpose there is no important difference between the PPFs for HO and SFM, so a single diagram is enough.) For each model is shown the case of the world relative price of food, p T being above the autarky price, p A . F C S A =D A p A p T u A u T D T S T Exp F RM: F C S A =D A p A p T u A u T D T S T Exp F HO & SFM: F C S A =D A p A p T u A u T D T =S T Exp F XSF:
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Econ 441 Alan Deardorff Problem Set 3 - Answers Specific Factors Model Page 2 of 8 b. In the move from autarky to free trade, a country increases its production of the good it exports. This is true in every model except XSF, where outputs of both goods are fixed at the levels that can be produced by the available specific factors. All of this can be seen above in the figures in part (a). c. The real return to some factor of production must rise in the move from autarky to free trade. This is true in all four models. One way of seeing it is simply from the gains from trade. Since the country gains from trade (moves to a higher indifference curve) in all four cases, and since all income in these models goes to factors of production, it must be true that factors in the aggregate are better off. So at least one of the factors, whatever and wherever they are, must earn a higher real return. Of course, we also know enough about the models to say more about which factor or factors these are. In the cases shown in part (a), of a country for which p F /p C rises with trade: RM: There is only one factor, labor, and its wage remains the same in terms of Food but rises in terms of Cloth: w/p F = 1/a LF is unchanged; w/p C = (w/p F )(p F /p C ) rises. HO:
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PS03a-SFM - Econ 441 Problem Set 3 - Answers Alan Deardorff...

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