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Homework 4 - Explain using Stopler-Samuelson theorem(10...

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ECON 460 Homework 4 due on February 25, 2011 1. The stock of capital in Pakistan is 10000 million units while its labor force is 120 million (rounded off!). Bangladesh’s capital stock is 8000 million units while its population is 100 million. Assume that Bicycle is relatively more capital intensive that cloth. Assume tastes are identical between the two nations? Use the framework of the HO model and the physical definition of factor abundance to draw the production possibility frontiers of the two countries and show the trade triangle for the two countries in one graph. (30 points) 2. What will happen to wages and return to capital in Bangladesh? How about Pakistan? (10 points) 3. Which group in Pakistan(capital-owners or wage-earners) will oppose free trade?
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Unformatted text preview: Explain using Stopler-Samuelson theorem. (10 points) 4. Let us say that capital is specific to the two above industries. If Bangladesh starts trading with Pakistan, what type of capital owners will oppose free trade? How about wage earners? Explain clearly using the specific-factors model (15 points) 5. Let us say that Pakistanis have a strong preference for bicycles, while Bangladeshis have a strong preference for cloth. What will be the pattern of trade? Draw a graph to explain. Is the pattern of trade consistent with the physical definition of capital abundance? How about the relative factor-price definition? (35 points)...
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