PS2_Fall09_SOLUTIONS

PS2_Fall09_SOLUTIONS - ECONOMICS 8B The Global Economy...

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ECONOMICS 8B CAN ERBIL The Global Economy Fall 2009 PROBLEM SET 2 - SOLUTIONS (Maximum 50 points) due on October 13 th (Tuesday) in class Please make your answers clear and to the point. 1. (8 points) From your textbook p.89, Q.8 ANSWER: 8. a. If all factors are immobile, the increase in the relative price of corn and the effort to expand corn production tends to benefit the earnings of all factors initially employed in corn production. This is also a decrease in the relative price of vehicles, so that vehicle production tends to decrease. This means that all factors initially employed in the vehicle industry tend to lose earnings. b. If all factors are freely mobile between the corn and vehicle industries, the winners and losers depend on the increased demand for each factor as corn production expands, relative to the release of each factor as vehicle production decreases. The labor-intensity of the two industries is almost the same ($0.60 of labor use per dollar of corn output and $0.59 per dollar of vehicle output). The overall demand for labor is affected only a little as vehicle production shrinks and corn production expands, because the release of labor by vehicles closely matches the need for additional labor in corn. Labor throughout the economy is likely to be affected only a little by the change. Corn is relatively land-intensive. The extra demand for land as corn expands, relative to the smaller amount released as vehicles shrink, leads to an increase in the real return to land. Vehicles is capital- intensive. The release of capital as vehicles shrink, relative to the smaller amount demanded as corn expands, leads to a decrease in the real return to capital. 2. (8 points) From your textbook p.89, Q.10
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ANSWER: 10. According to Figure 5.3, Japan is relatively abundant in physical capital, highly-skilled labor, and medium-skilled labor. Japan is relatively scarce in unskilled labor and arable and forest land. Japan is also relatively scarce in natural resources generally. (1) The following appear to be consistent with the predictions of the Heckscher-Ohlin theory. Japan is a substantial net importer of food (land-intensive), metal ores and crude petroleum products (natural resource- intensive), and clothing and accessories and shoes and other footwear (unskilled labor-intensive). Japan is a substantial net exporter of iron and steel (physical capital-intensive). Substantial net exports of automobiles also appear to be consistent with the Heckscher-Ohlin theory, to the extent that their production is relatively physical capital-intensive (or skilled labor-intensive). (2) The following appear to inconsistent. The substantial net imports of pharmaceuticals, aircraft,
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PS2_Fall09_SOLUTIONS - ECONOMICS 8B The Global Economy...

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