1. Suppose that the United States and Canada have the factor endowments in the following table. Suppose further that the production requirements for a unit of steel are 2 machines and 8 workers, and the requirement for a unit of bread is 1 machine and 8 workers. United States Canada Capital 40 machines 10 machines Labor 200 workers 60 workers
a. Which country is relatively more labor-abundant? Which country is relatively more capital-abundant? Explain your answer.
b. Which good, bread or steel, is relatively capital-intensive? Labor-intensive? Explain your answer.
c. What is the range for the relative price of bread such that the US economy produces both bread and steel? Which good is produced if the relative price is outside of this range?
d. Which country would export bread? Why?
e. Suppose that before trade takes place, the United States is at a point on its PPC where it produces 20 loaves of bread and 20 units of steel. Once trade becomes possible, the price of a unit of steel is 2 units of bread. In response, the United States moves along its PPC to a new point where it produces 30 units of steel and 10 units of bread. Is the country better off? How do you know?
f. Explain what happens to the returns to capital and labor after trade begins.
1. Suppose that the United States and Canada have the factor endowments in the following table. Suppose further that the production requirements for a unit of steel are 2 machines and 8 workers, and the requirement for a unit of bread is 1 machine and 8 workers. United States Canada Capital 40 machines 10 machines Labor 200 workers 60 workers
a. Which country is relatively more labor-abundant? Which country is relatively more capital-abundant? Explain your answer.
b. Which good, bread or steel, is relatively capital-intensive? Labor-intensive? Explain your answer.
c. What is the range for the relative price of bread such that the US economy produces both bread and steel? Which good is produced if the relative price is outside of this range?
d. Which country would export bread? Why?
e. Suppose that before trade takes place, the United States is at a point on its PPC where it produces 20 loaves of bread and 20 units of steel. Once trade becomes possible, the price of a unit of steel is 2 units of bread. In response, the United States moves along its PPC to a new point where it produces 30 units of steel and 10 units of bread. Is the country better off? How do you know?
f. Explain what happens to the returns to capital and labor after trade begins.
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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.
1. The capital stock in India is $22 trillion, and the labor force is 511 million people. The capital stock in Sri Lanka is $584 billion, and the labor force is 8 million people. Which country is relatively capital abundant?
A.India.
B.Sri Lanka
2. The capital to labor ratio in steel production in India and Sri Lanka is higher than the capital to labor ratio in textile production in both countries. We can say that the steel industry is
A.relatively capital abundant in both countries.
B.relatively capital intensive in both countries.
C.has a comparative advantage over the textile industry.
D.has an absolute advantage over the textile industry.
3. Using the data from the previous two problems, and assuming that the only two countries in the world are Sri Lanka and India, the Heckscher-Ohlin Theorem predicts that ________ , and the Stolper Samuelson Theorem predicts that _____________.
| A. |
India will export steel; labor in India will benefit from trade. |
|
| B. |
Sri Lanka will export steel; labor in Sri Lanka will benefit from trade. |
|
| C. |
India will export steel; capital owners in India will benefit from trade. |
|
| D. |
Sri Lanka will export steel; capital owners in Sri Lanka will benefit from trade. |
