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Probset1

# Probset1 - L Karp International Trade March 2008 Problem...

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L Karp International Trade March 2008 Problem set 1 The point of this exercise is to practice using algebraic and geometric methods to analyze the international e ff ects of a change in one country. 1. Suppose, as in the notes, that Canada has a comparative advantage in the production of corn. The two countries trade, and there is a small improvement in US umbrella technology. (The amount of labor required to produce one umbrella decreases in the US.) Assume that the exogenous change in technology is small enough that the equilibrium regime does not change; that is, a country produces a product after the change if and only if it also produced the product before the change. Show what happens to world price and to the countries’ welfare under the three possibilities for the trade equilibrium: a) only the US is specialized; b) both countries are specialized; and c) only Canada is specialized. Answer this question using the 0 pro fi t conditions to determine equilib- rium prices and real wages under the three possibilities. The only (slightly) tricky part of this question concerns the situation where both countries are specialized in equilibrium. In this case, you need to know how the technological change alters the equilibrium relative price of umbrellas. The answer to this question is unambiguous. Begin with a common sense answer. (Think: improving the technology will cause supply

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