ps2 - ECON 450 INTERNATIONAL TRADE MARK MOORE FALL 2011...

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ECON 450: INTERNATIONAL TRADE MARK MOORE FALL 2011 PROBLEM SET 2 A. Do all the problems at the end of chapters 2 in the Krugman-Obstfeld text. B. Consider the DFS model with a continuum of goods, arranged in order of declining home comparative advantage. The goods are indexed by z, with 0 z 1. Let denote the specialization cutoff good, i.e., the last good that home can produce. So home produces goods indexed 0 to and foreign produces the remaining goods. Let a(z) represent the home until labor requirement for good z and a*(z) represent the foreign unit labor requirement for good z. The model has two unknowns, the relative wage ϖ ( w/w*) and the cutoff good , and two equations, as follows. (i) (ii) (where σ (z) is the share of total spending on goods 0 to z) 1. Graph the equations in the model and show what happens to the equilibrium when the home country gets bigger relative to the foreign country (so that L*/L falls). What happens to the relative wage and the range of goods produced by the home country? What happens to home welfare?
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ps2 - ECON 450 INTERNATIONAL TRADE MARK MOORE FALL 2011...

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