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Unformatted text preview: Economics 181: International Trade Assignment #1: Due February 15 (Thursday), beginning of class Professor Roland‐Holst, Spring 2011 1. The Ricardian Model of Trade Iceland has 300 units of labor, while there are 400 units in Canada. Iceland and Canada, each producing lumber and fish, have the following unit labor requirements: Iceland Canada Lumber 2 1 Fish 10 5 a) What is the relative price of lumber to fish in Iceland if there is no trade? b) Will Iceland and Canada decide to trade? Why or why not? Suppose that Iceland improves its productivity in fishing, possibly by acquiring better boats. Then the unit labor requirements change to the following: Iceland Canada Lumber 2 1 Fish 8 5 c) Which country has the absolute advantage in producing lumber? Fish? d) Which country has a comparative advantage in producing lumber? Fish? e) Draw a world supply schedule which shows lumber production relative to fish. f) Draw a relative demand schedule which implies incomplete specialization by Iceland. g) Compute relative wages for Iceland relative to Canada for the scenario described in (f). h) Draw the new world supply schedule that will result if Iceland.s labor force increases to 480. 2. Consider the following table which shows the labor input required per unit of output in each of two industries: Shirts Oil Nigeria 6 12 Kenya 4 12 Which of the following statements are correct? a) Kenya’s autarky price ratio is 1 Oil=2 Shirts b) Nigeria’s autarky price ratio is 1 Shirt=3 Oil c) Nigeria has an absolute advantage in both goods d) Kenya will export shirts after trade begins 3. In the Ricardian model if a country’s P(y)/P(x) in autarky is greater than the P(y)/P(x) in the world market it has a comparative advantage in good ‐‐‐‐‐‐‐‐‐‐‐‐‐, and it will...................... (a) X; export Y and import X (b) X; export X and import Y (c) Y; export Y and import X (d) Y; export X and import Y 4. Home (no asterisk) and Foreign (asterisk) produce cheese and wine with the following unit labor requirements: Home Foreign alc* = 6 Cheese alc = 5 Wine alw = 2 alw* = 6 Home and Foreign have total labor forces of L=100 and L* = 200 workers (a) Graph each country’s production possibility frontier and calculate the opportunity cost of cheese in terms of wine. Which country has an absolute advantage in cheese production, which in wine production? Which country has a comparative advantage in cheese production, which in wine production? (b) Using the graph from your preceding answer, draw each country’s consumption possibilities in the absence of trade. Calculate the relative prices of cheese in terms of wine in autarky. (c) Both countries open up to free trade. Graph the relative world supply of cheese to wine and its response to the relative world price of cheese Pc/Pw based on the unit labor requirements. Provide specific values on the axes. (d) EXTRA CREDIT: World consumer demand for cheese relative to wine depends on the relative price of the two goods: (Qc + Qc*)/(Qw + Qw*) = 6 – 5(Pc/Pw). Graph the relative demand curve. Calculate the relative price Pc/Pw of cheese in world trade equilibrium. Calculate the production of Qc,Qc*, Qw and Qw*. Calculate the equilibrium wage rates w and w* under free trade. Be explicit about your assumptions regarding demand (e.g. Leontief preferences). ...
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This note was uploaded on 03/18/2011 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at University of California, Berkeley.
- Spring '07