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Unformatted text preview: Econ 370 Fall 2011 International Trade Professor Soderbery Homework 3 ANSWER KEY Short Answer Questions: Ricardian Model 1. In the Ricardian model, if both countries have identical technologies, but one country has twice as much labor can trade be mutually beneficial? ANSWER: Technological differences generate gains from trade in the Ricardian model so if both countries have the same technology there will be no gains from trade. 2. In a two country, two good, Ricardian model under free trade, if the MPL in the industry you are not specialized in increases, without changing patterns of comparative advantage, what will happen to the real wages? ANSWER: If the pattern of specialization is unchanged, so too is the pattern of trade. Since wages are determined by the productivity of the good you export, which has not changed in this example, real wages remain unchanged. Short Answer Questions: Specific Factors Model For questions 3-6 regarding the Specific Factors models assume there are two countries (Home and Foreign), two goods (Manufacturing and Agriculture) and three factors of production (capital, land and labor) with capital and land being specific to Manufacturing and Agriculture respectively. 3. In the specific factors model if both countries have identical endowments of all three factors as well as identical preferences can trade be mutually beneficial? ANSWER: No. Comparative advantage in the Specific Factors model comes from differences in factor endowment. When preferences and endowments are identical relative prices will also be identical, allowing for no grains from arbitrage. 4. In the specific factors model if the price of Agriculture increases as a result of trade, it is possible for labor to gain more that the owners of land? ANSWER: No. In the Specific Factors model the change in the return to the mobile factor of production always lies between the changes in the two prices, whereas the change in the return to land will exceed the increase in the price of Agriculture. 5. In the specific factors model with fixed world prices if the endowment of labor increases what will happen to the real return to labor? What about the real returns to capital and land? ANSWER: The real return to labor will fall as wages will fall in both industries and the real return to both specific factors will increase since labor flows into both industries, which drives up the MPK in both industries. Econ 370 Fall 2011 International Trade Professor Soderbery 6. In the specific factors model with fixed world prices if the endowment of either specific factor decreases what will happen to the real returns to both specific factors? ANSWER: A decrease in either specific factor will result in an increase in the real return to both specific factors....
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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.
- Fall '08