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2009 - summer - midterm - solutions

The real wage is unchanged measured in terms of the

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The real wage is unchanged measured in terms of the Export good (= MP L export ) but real wage increases when measured in terms of the import good. Home: exports Toys - Trade will bene±t Steel-lovers. Foreign: exports Steel - Trade will bene±t Toy-lovers. 3
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PART C: 1. Consider the 2 good, 2 country Ricardian ( 1 factor) and Heckscher-Ohlin ( 2 factor) models of trade. (a) In the Ricardian model, the opportunity cost of producing a good is constant for all levels of output. If the relative price of a good is greater than the opportunity cost the country will maximize the value of production by producing only that good. Conversely, if the opportunity cost is greater than the relative price of the good then it will be value-maximizing for the country to set production of that good to zero. T * PPF * 200 600 S* ISOVALUE LINES INCREASING VALUE MAXIMUM VALUE In the Heckscher-Ohlin model, the opportunity cost varies along the Production Possibilities Frontier. When production of good 1 is low and production of good 2 is high then the opportunity cost of producing more good 1 is low. Marginal productivity of factors in the production of good 1 will be high, so it will not be necessary to take too many resources out of production of good 2 : At the same time, because a lot of good 2 is being produced, the marginal productivity of factors used in the production of good 2 will be relatively low, so taking some of the factors out of good 2 production will not lower output of good 2 by much. When production of good 1 is already at a high level and production of good 2 is at a low level, then the opportunity cost of additional good 1 will be high.
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