Unformatted text preview: ECON‐ENVECON C181 – International Trade Name________________________ Problem Set 2 GSI________________________ Problem Set 2: DUE AT THE BEGINING OF LECTURE Due Tuesday, March 15th Exercise 1: Consider two countries that differ only in the composition of their labor force (the share of skilled to unskilled labor). In country “A”, 45% of the labor force is skilled, while in country “B”, only 25% of the labor force is skilled. The two categories of labor are the only factors of the economy. Note that in this simplified model, we consider that it is not possible to train and increase the share of skilled workers. The shares are thus fixed. There are only two goods: cloth (C) and microchips (M). Both countries have the same technology: It takes 10 hours of skilled labor (LS) and 10 hours of unskilled labor (LU) to produce a ton of microchip. You need 5 hours of unskilled labor and one hour of skilled labor to produce one ton of cloth. The production factors are not substitutable. Assume there are 10,000 inhabitants in each country, and that the whole population is part of the labor force. a) Graph an isoquant of the microchip industry. b) Draw the production possibility frontier for each country. Make sure to identify the intersection points and kinks. c) Assuming that both countries locate at the kink of their PPFs (nice and well behaved social utility curves), give an interval for the price of microchips in terms of cloth. d) Assuming preferences are identical in both countries, in which country would you expect the price of microchips in terms of cloth to be higher? Why? e) From now on, assume that the resulting price of microchips in terms of cloth in country B is 8 (this should be coherent with your answer to question d) and that it is only 4 in A. Calculate the wage of qualified workers relative to unskilled workers in both countries. (You can use assumptions we made in studying the Heckscher‐Ohlin model – please state the ones you use). f) When both countries open up to trade, the price of microchips in terms of cloth should equalize to some intermediate level. Assume the world price of microchips relative to cloth is 6. What is now the wage of skilled workers relative to unskilled workers? g) Who benefits from trade? Who loses? (Hint: note that for this question, you cannot simply look at the new relative wages: indeed, wages changed, but prices changed as well! You must look at the purchasing power of the new wages). What theorem does this exemplify? ECON‐ENVECON C181 – International Trade Name________________________ Problem Set 2 GSI________________________ Exercise 2: Assume France is producing only wine and cheese, which both necessitate labor but different kinds of capital (vine for wine and goats for cheese). Labor is perfectly mobile between both sectors. A plant disease (phylloxera) spreads and destroys 50% of the French vines. Explain what happens to the repartition of the labor force and to the wages (use a graph and write a short explanation). Exercise 3: Go back to the preceding exercise. Now, France is a relatively goat‐abundant country. It decides to engage in trade with the rest of the world. Which of the following sentences seem true to you? A. Workers earn less, vine owners earn more, goat owners earn less B. 50% of the goats are slaughtered to restore the proportions with the vines C. Workers earn more, vine owners earn less, goat owners earn more D. France exports cheese and wine. E. France exports its students to promote French wine in the PSs they write in the US F. France exports wine G. Workers earn less, vine owners earn less, goat owners earn more H. France exports cheese I. Workers earn more, vine owners earn more, goat owners earn less J. French wine is still bought all over the world because it tastes incredibly good Exercise 4: In two lines, explain the main difference between the Ricardian Model and the Heckscher‐ Ohlin model? ...
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