ProblemSet2_colorado - 1 Economics 4413 International Trade...

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1 Economics 4413 International Trade Keith Maskus Problem Set #2 Keep in mind that problem sets will not be graded. I will circulate answers to problem sets in advance of the examinations. Ricardian Model There are no more important concepts in international trade than those of comparative advantage and the gains from trade (GFT). Because these are so fundamental, I want you to work through several of these kinds of problems. The first 3 questions below are examples. In the first case I provide answers as the question unfolds. In the other cases no answers are provided (for now). PLEASE TAKE THESE QUESTIONS SERIOUSLY. THERE WILL BE ONE LIKE IT ON THE NEXT EXAM. YOU MIGHT ALSO FIND IT USEFUL TO MAKE UP YOUR OWN EXAMPLES; DOING SO REALLY HELPS GET THESE IDEAS DOWN. 1. Suppose that the following technologies exist for the production of X and Y in countries H and F. Output per unit of Labor: X Y H 8 15 F 10 30 A. Determine absolute advantage and comparative advantage in each good. Also determine the relative price ratios (price of X over price of Y) in autarky. Answers: Because labor is more productive in both X and Y in F, F has the absolute advantage in both goods. However, F is only 5/4 times as productive in X but 2 times as productive in Y. So F has a comparative advantage in Y and H has a comparative advantage in X. p F = 30/10 = 3.0. p H = 15/8 = 1.875. Note in both cases that the price of X is higher than the price of Y because each worker can produce fewer X's or more Y's for her unit of time. Note also that the limits to the terms of trade are 15/8 p* 3.0 B. Suppose the home country has a labor endowment of 50 workers and foreign has a labor endowment of 25 workers. Draw the PPFs. Suppose that H allocates 2/3 of its workforce to X and 1/3 to Y in autarky, while F allocates 1/2 of its workforce to Y and 1/2 to X in autarky. Show the autarky equilibrium points.
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2 Answers: Home's PPF extends from 400 X to 750 Y and has a slope (absolute value) of 1.875. Foreign's PPF extends from 250 X to 750 Y and has a slope of 3.0. In autarky, Home produces and consumes 266.7 X and 250 Y. Foreign produces and consumes 125 X and 375 Y. Note that the PPF's are straight lines by virtue of the assumption that marginal products of labor are constant. (THIS IS NOT THE CASE IN THE HECKSCHER-OHLIN MODEL WITH TWO FACTORS OF PRODUCTION AND DIMINISHING MARGINAL PRODUCTS OF LABOR AND CAPITAL. IN THAT CASE WE GET A CONCAVE PPF EVEN THOUGH THERE ARE CONSTANT RETURNS TO SCALE IN BOTH GOODS.) Y Y 800 750 750 490 375 260 250 266.7 400 X 125 250 375 X Home 270 Foreign 130 C. Suppose the international price ratio in free trade between H and F is p* = 2.0 and that 130 X are exported. Determine which country exports X, how many Y are exported (and by which country) and draw the new equilibrium points in free trade. Calculate gains from trade. Answers: p* = 2.0 means that each X is worth 2 Y in international trade.
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This note was uploaded on 05/13/2010 for the course ECON 181 taught by Professor Lee during the Spring '10 term at UCLA.

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ProblemSet2_colorado - 1 Economics 4413 International Trade...

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