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Unformatted text preview: Econ 370 Fall 2011 International Trade Professor Soderbery Homework 2 ANSWER KEY Short Answer Questions (answer the following questions in a few sentences) 1. In the HeckscherOhlin model what generates comparative advantage? ANSWER: Relative factor endowments generate comparative advantage in the H-O model by changing the shapes of each countrys PPF. 2. Which factor of production will oppose trade in the HeckscherOhlin model? ANSWER: The H-O and the Stolper-Samuelson theorems together tell us that scarce factor of production will oppose trade since trade will lower the price of the good which uses the scarce factor intensively. 3. If there are only two countries in the world and each country has exactly the same factor endowments would the HeckscherOhlin model predict gains from trade? ANSWER: No. If two countries have the exact same factor endowments they will also have identical PPFs, therefore they will also have identical relative prices. Specific Factor Returns: Numerical Example 4. Using the following information to answer the question below using the cost share approach. Computers: Sales revenue = P C *Q C = 150 Payments to labor = W*L C = 75 Payments to capital = R K *K K = 75 Barley: Sales revenue = P B *Q B = 150 Payments to labor = W*L B = 70 Payments to capital = R T *K T = 80 Holding the price of computers constant, suppose the percentage increase in the price of barley is 10% and the percentage increase in the wage is 5% after trade. a. Determine the impact of the increase in the price of barley on the rental rate of land. Econ 370 Fall 2011 International Trade Professor Soderbery ANSWER: Using the same Jones Algebra as in 9 we have the following Assuming that the price of barley increases by 10% and the percentage increase in the wage is 5% after trade. b. Determine the impact of the increase in the price of barley on the rental rate of capital. Assuming that the price of computers does not change and the percentage increase in the wage is 5% after trade. increase in the wage is 5% after trade....
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This note was uploaded on 02/06/2012 for the course ECON 370 taught by Professor Staff during the Fall '08 term at Purdue University-West Lafayette.
- Fall '08
- Comparative Advantage