Suppose that two countries in a two-country-two-factor-two-commodity model have identical and homothetic tastes, have identical endowments of labor and have the same technology in the capital-intensive industry. However the foreign country has a larger endowment of capital than the home country and has a Hicks-neutral technological advantage over the home country in the production of the labor-intensive commodity, product 1. [Hint: A Hicks-neutral technological advantage shifts the isoquants up without changing their shape and thus marginal rate of substitution along any ray from the origin, i.e., λX1 = λf(K,L) where λ is the degree of the technological change in product 1.]
(i) What is the pattern of trade between the two countries if we also know that, in autarky, the wage-rental ratio is higher in the foreign country than it is in the home country? Explain as carefully as you can each step of your reasoning. In order to solve this problem, break down the problem in two sub-questions, (i) what happens if there is no technological difference and differences only with respect to endowments, and (ii) what happens if there is no difference in endowments and the only difference is about technology.
Suppose that two countries in a two-country-two-factor-two-commodity model have identical and homothetic tastes, have identical endowments of labor and have the same technology in the capital-intensive industry. However the foreign country has a larger endowment of capital than the home country and has a Hicks-neutral technological advantage over the home country in the production of the labor-intensive commodity, product 1. [Hint: A Hicks-neutral technological advantage shifts the isoquants up without changing their shape and thus marginal rate of substitution along any ray from the origin, i.e., λX1 = λf(K,L) where λ is the degree of the technological change in product 1.]
(i) What is the pattern of trade between the two countries if we also know that, in autarky, the wage-rental ratio is higher in the foreign country than it is in the home country? Explain as carefully as you can each step of your reasoning. In order to solve this problem, break down the problem in two sub-questions, (i) what happens if there is no technological difference and differences only with respect to endowments, and (ii) what happens if there is no difference in endowments and the only difference is about technology.
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Draw the graph carefully. Please use one graph per country and show both the autarky and the free trade equilibrium on each graph.
Consider the following data on the factor endowments of two countries A and B:
Countries |
||
Factor Endowments |
A |
B |
Labor force: L |
100 workers |
50 workers |
Capital Stock: K |
60 machines |
10 machines |
a. Which country is relatively capital abundant? Which country is relatively labor abundant? Explain (calculate the ratios).
b. Supposing that cars are capital intensive relative to shoes, which country will have a comparative advantage in the production of cars? Of shoes? Explain.
c. Graphically demonstrate the pre-trade and post-trade equilibrium between these two countries (production and consumption points). Draw a Demand Diagonal. Find and label the trade triangles for each country.
d. Which factor gains and which factor loses when trade arises between these two countries? Explain precisely.