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Study_Questions-1 - International Economics ECON-UA 238.004...

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1 International Economics ECON-UA 238.004 New York University, Fall 2011 by Arhan Ertan Study Questions – 1 1. It may be argued that international labor mobility and trade are substitutes to each other. Explain. (Hint: Think about the ‘factor content of trade’.) Answer: Workers earning lower real wages will have an incentive to move to a higher-wage country. Using the Neo-Classical model framework, this means that countries with relative more labor per unit capital may be said to have a relative abundance of labor (or a comparative advantage in labor). They will therefore export their labor. Turning to the Neo-Classical trade model, we know that a country that is relatively labor abundant will export products (and enjoy comparative advantage) in products that embody relatively more labor. Hence, trade exports labor indirectly embodied in products. This allows the workers to raise their real wage instead of doing it by physically moving to the capital rich country. 2. Suppose there are three countries capable of producing two goods, cloth and food and each country has only one factor of production, labor with different labor requirement ratios. Construct the world relative supply curve (with Pc/Pf on the vertical axis and Qc/Qf on the horizontal axis) and draw an arbitrary relative demand curve to determine the world equilibrium relative price and the pattern of production and trade in each of those countries. (Hint: Compare Pc/Pf with each country’s a c /a f ) Answer: The world relative supply curve in this case consists of a step function with 3 “steps” (horizontal portions) at the three different unit labor requirement ratios. Any countries to the left of the intersection of the relative demand and relative supply curves export cloth - the good in which they have a comparative advantage relative to any country to the right of the intersection. If the intersection occurs in a horizontal portion then the country with that unit labor requirement ratio produces both of the goods below and above. 3.
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This note was uploaded on 04/06/2012 for the course ECON UA 23 taught by Professor Arhan during the Fall '11 term at NYU.

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Study_Questions-1 - International Economics ECON-UA 238.004...

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