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Assuming a two-country, two-good, perfect competition model of trade with multiple factors, and mobile labor but specific other factors. Suppose that country finds that with trade the relative price of one of the goods it produces, say machines, has decreased. If machines are produced using capital and labor, and the other good, textiles are produced using land and labor. Explain clearly what happens to the fortunes of these four groups as a result of trade: Owners of labor employed in textiles, owners of labor employed in machines, owners of the land, and owners of capital. Which of these groups, if at all any, would be opposed to trading?

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

The home produces two goods, computers and wheat. Capital is specific to computers, the land is specific to wheat, and labor is mobile between the two industries. Home has 100 workers and 100 units of capital but only 10 units of land. Foreign also produces computers and wheat using capital, which is specific to computers; land, which is specific to wheat; and labor, which is mobile between the two sectors. Foreign also has 100 workers but instead has 100 units of land and only 10 units of capital. It has the same production functions as at Home.

Clearly indicate the correct answer in italics for the following question:

The no-trade price of wheat will be higher/lower in Home than in Foreign because Home has more, fewer units of land than Foreign. The no-trade price of computers will be higher/lower in Home than in Foreign because Home has more, fewer units of capital than Foreign.

If the trade is opened, with trade the relative price of wheat will increase/decrease in Home and increase/decrease in Foreign. If the trade is opened, the rental on capital will increase/decrease at Home and the rental on land will increase/decrease in Foreign.

3. Gains from trade

Consider two neighboring island countries called Felicidad and Arcadia. They each have 4 million labor hours available per month that they can use to produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor.

Country Jeans Rye
(Pairs per hour of labor) (Bushels per hour of labor)
Felicidad 8 32
Arcadia 12 24

Initially, suppose Arcadia uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce rye, while Felicidad uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce rye. Consequently, Felicidad produces 24 million pairs of jeans and 32 million bushels of rye, and Arcadia produces 12 million pairs of jeans and 72 million bushels of rye. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of jeans and rye it produces.

Felicidad's opportunity cost of producing 1 pair of jeans is _____ of rye, and Arcadia's opportunity cost of producing 1 pair of jeans is _____ of rye. Therefore, _____ has a comparative advantage in the production of jeans, and ____ has a comparative advantage in the production of rye.

Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces jeans will produce ______ millions pairs per month, and the country that produces rye will produce ______ millions bushels per month.

In the following table, enter each country's production decision on the third row of the table (marked "Production").

Suppose the country that produces jeans trades 26 million pairs of jeans to the other country in exchange for 78 million bushels of rye.

In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption."

When the two countries did not specialize, the total production of jeans was 36 million pairs per month, and the total production of rye was 104 million bushels per month. Because of specialization, the total production of jeans has increased by ____ million pairs per month, and the total production of rye has increased by _____ million bushels per month.

Because the two countries produce more jeans and more rye under specialization, each country is able to gain from trade.

Calculate the gains from trade—that is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").

Felicidad

Arcadia
Jeans Rye Jeans Rye
(Millions of pairs) (Millions of bushels) (Millions of pairs) (Millions of bushels)
Without Trade
Production 24 32 12 72
Consumption 24 32 12 72
With Trade ? ? ? ?
Production ? ? ? ?
Trade action ? ? ? ?
Consumption ? ? ? ?
Gains from Trade ? ? ? ?
Increase in Consumption ? ? ? ?

3. Gains from trade

Consider two neighboring island countries called Euphoria and Contente. They each have 4 million labor hours available per week that they can use to produce rye, jeans, or a combination of both. The following table shows the amount of rye or jeans that can be produced using 1 hour of labor.

Country Rye Jeans
(Bushels per hour of labor) (Pairs per hour of labor)
Euphoria 8 32
Contente 12 24

Initially, suppose Contente uses 1 million hours of labor per week to produce rye and 3 million hours per week to produce jeans, while Euphoria uses 3 million hours of labor per week to produce rye and 1 million hours per week to produce jeans. Consequently, Euphoria produces 24 million bushels of rye and 32 million pairs of jeans, and Contente produces 12 million bushels of rye and 72 million pairs of jeans. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of rye and jeans it produces.

Euphoria's opportunity cost of producing 1 bushel of rye is（ ） of jeans, and Contente's opportunity cost of producing 1 bushel of rye is（ ） of jeans. Therefore, （ ）has a comparative advantage in the production of rye, and（ ） has a comparative advantage in the production of jeans.

Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces rye will produce （ ）million bushels per week, and the country that produces jeans will produce （ ） million pairs per week.

In the following table, enter each country's prod uction decision on the third row of the table (marked "Production").

Suppose the country that produces rye trades 26 million bushels of rye to the other country in exchange for 78 million pairs of jeans.

In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption."

When the two countries did not specialize, the total production of rye was 36 million bushels per week, and the total production of jeans was 104 million pairs per week. Because of specialization, the total production of rye has increased by（ ）million bushels per week, and the total production of jeans has increased by （ ）million pairs per week.

Because the two countries produce more rye and more jeans under specialization, each country is able to gain from trade.

Calculate the gains from trade—that is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").

Euphoria

Contente
Rye Jeans Rye Jeans
(Millions of bushels) (Millions of pairs) (Millions of bushels) (Millions of pairs)
Without Trade
Production 24 32 12 72
Consumption 24 32 12 72
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption

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