ECN 707 Study Guide - Quiz Guide: Isoquant, Autarky, Demand Curve

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graylouse631

5 Jul 2015

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Transcript: heckscher-ohlin model (1): solving a two factor closed economy model: slide 1: welcome. I am dr. claustre bajona and this is the first of a series of four videos on the heckscher-ohlin model of trade. Markets are assumed to be perfectly competitive: slide 3: to produce the two goods, firms use capital and labor. The notation in the slide indicates that a producer who wants to produce qc units of cloth, it can combine kc units of capital and lc units of labor in the specific way determined by the function fc. Similarly, a producer of food can combine kf units of capital and lf units of labor, in the way indicated by the function ff, to obtain qf units of food. In general, we assume that the combinations of capital and labor that can produce a given amount of output are not unique.

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1. Use the information in the table below to answer the following questions.

	US	Argentina
wheat	300	20
beef	100	20

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.

(b) What is the opportunity cost of wheat in each country?

(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.

2. Suppose that China is labor-abundant country and U.S. is capital-abundant country. iPad is capital-intensive and cloth is labor-intensive. Show that U.S. exports iPad after opening up to trade using Heckscher-Ohlin model.

3. Explain the immiserizing growth using standard trade model.

4. Consider the following Heckscher-Ohlin model: there are two countries, America and China, two goods, high-tech manufactures and low-tech manufactures, and two factors of production, skilled labor and unskilled labor. America is skilled-labor abundant and China is unskilled-labor abundant. High-tech manufactures are skilled-labor intensive and low-tech manufactures are unskilled-labor intensive. What happens to the price of high-tech manufactures relative to the price of low-tech manufactures in America following trade?

pearfrog157

1. The Heckscher Ohlin model Home and Foreign have twoproduction factors, skilled and unskilled labor and produce twogoods, textiles and computers. Home is skilled labor abundant,and computers are skilled labor intensive. Starting from asituation of autarky, the two countries liberalize trade. Assumingthat the two countries produce both goods before and after tradeliberalization, answer the following questions:

(a) What is the effect of trade liberalization on the relativeprice of com- puters at Home and in Foreign?
(b) What is the effect of trade liberalization on the output ofcomputers and textiles at Home and in Foreign?
(c) What is the effect of trade liberalization on aggregatewelfare in the two countries?
(d) What is the effect of trade liberalization on the realfactor returns in Home and Foreign? Please provide a graphicalexplanation for your argument. What is the name of this famousresult?

2. The Heckscher-Ohlin model Recently, computer programmers indevel- oping countries like India have begun doing some workformerly done in the United States. This shift has undoubtedly ledto substantial pay cuts for some programmers in the United States.Answer the following two questions:

(a) How is it possible, when the wages of skilled labor arerising in the United States as a whole?
(b) What argument would trade economists make against seeingthese wage cuts as a reason to block outsourcing of computerprogramming?

3. The Heckscher-Ohlin model This question asks you to reviewsome of the empirical tests of the Heckscher-Ohlin model.

(a) Explain how the Leontief Paradox and the more recent resultsby Bowen, Leamer and Sweikauskas discussed in class and in thetextbook contradict the predictions of the Heckscher Ohlinmodel.

(b) In the discussion of empirical results on the HeckscherOhlin model, we noted that recent work suggests that the efficiencyof production factors differ across countries. Explain how thiswould affect the concept of factor price equalization.

bluelion33

Consider the following Heckscher-Ohlin model. Spain and Italy produce shoes and T-shirts using capital and labor. Spain is labor abundant and Italy is capital abundant. Shoes are capital-intensive and T-shirts are labor-intensive.

For each statement below determine if it is true or false. Then briefly explain why.

suppose both countries are in closed economy equilibria.

1. Spain has a larger labor force than Italy (i.e. ) because Spain is labor abundant.

2. In Italy, the shoe industry employs more capital than the T-shirt industry because shoes are capital intensive.

3. The shoe industry has a lower labor-capital ratio than the T-shirt industry in both countries.

4. The relative price of shoes, in terms of T-shirts, is lower in Italy than in Spain.

coralhamster231

ECN 707 Study Guide - Quiz Guide: Isoquant, Autarky, Demand Curve

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