2009 - fall - midterm - solutions

An eective facto endowment measures the endowment of

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An e/ective facto endowment measures the endowment of a factor of production taking into account the productivity of the factor. Using the e/ective factor measures E/ective T L Home = 100 200 = 1 2 E/ective T L Foreign = 75 225 = 1 3 Home has a relative abundance in land - Home should import goods that use labour intensively. 4. Explain why the graph of the Relative Demand for labour in the Ricardian model consists of both downward-sloping and horizontal segments. see lecture notes 5. Provide an explanation of why national borders (such as the border between Canada and the United States) may limit the gains from free-trade. You should discuss this in the context of the gravity model and use a comparison of trade patterns between British Columbia and other parts of Canada and between British Columbia and states in the United States. The gravity model predicts that the volume of trade between two countries is positively related to the size of the trading partners and inversely related to distance. the model would predict the same volume of trade between 2 partners within the same country (eg. between provinces) or across borders (eg. between a province and a state) if the distances and size of the economies were equal. The presence of national borders may increase the cost of trade even when the distance is unchanged. Comparing interprovincial (BC and other provinces) with international (BC an US states) there is a ²nding that there is greater interprovincial trade than international trade. PART B: 1. Consider a world with two goods, Cloth ( C ) and Food ( F ). There are 2 countries, Home and Foreign. Home has a comparative advantage/is e¢ cient in the production of Cloth. (a) Suppose the Ricardian model applies: there is a single factor of production, Labour ( L ) : The Unit Labour requirement ( a Li ) is constant with respect to good i (Cloth or Food) as is Marginal Product of Labour, MP Li = 1 a Li . Use a graph to show how the Home country±s Production Possibilities Frontier changes when Home±s 2
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Labour force increases from L to ^ L . Be sure to label axes and note the values of intercepts and slopes. L/a LF F Slope= -a LC /a LF L/a LC C L ^ /a LC L ^ /a LF (b) For the change in Home±s Labour force in ( a ) ; use a graph to show how the World Relative Supply of Cloth will change, and explain what is likely to happen to the Home country±s Terms of Trade. Be sure to label axes and note the values of intercepts and slopes.
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