Dr.

Akay
Names:

Hmw-1

Due to November 11
1) Suppose that each worker in the home country can produce three cars or
two televisions. Assume that Home has four workers.
a) Graph the production possibilities frontier for the home country. (1p)

b) What is the no-trade relative price of cars at Home? (1p)

Suppose that each worker in the foreign country can produce two cars or three
televisions. Assume that Foreign also has four workers.
c) Graph the production possibilities frontier for the foreign country. (1p)

d) What is the no-trade relative price of cars in Foreign? (1p)

e) In which good does Foreign have a comparative advantage and why?

(2p)
f) Suppose that in the absence of trade, Home consumes nine cars and
two televisions and Foreign consumes two cars and nine televisions.
Add the indifference curve for each country to the figures in part (a)
and (b). Label the production possibilities frontier (PPF), the
indifference curve (U1), and the no-trade equilibrium consumption and
production for each country. Label Home and Foreignsno-trade
consumption points as A and A*, respectively. (2p)

Now suppose the world relative price of cars is PC / PT V = 1.

g) What good will each country specialize in? Briefly explain why ? (1p)

h) Graph the new world price line for each country (in the same figure),
and add a new indifference curve (U2) for each country in the trade
equilibrium. (2p)

i)

Label the exports and imports for each country. How does the amount
of Home exports compare with Foreign imports? (2p)

j)

Does each country gain from trade? Briefly explain why or why not.
(2p)

2) Use the information given here to answer the following question.

Manufacturing:
Sales revenue = Pm * Qm = 150

Payments to labor = w * Lm = 100

Payments to capital = Rk * K = 50
Agriculture:
Sales revenue = Pa * Qa = 150
Payments to labor = w * La = 50
Payments to land = Rt * T = 100
Holding the price of manufacturing constant, suppose the increase in the
price of agriculture is %10 and the increase in the wage is %5.
a) Determine the impact of the increase in the price of agriculture on the
rental on land and the rental on capital (10p)

b) Explain what has happened to the real rental on land and the real rental
on capital ? (5p)

3) Consider two countries (Mexico and Canada).that can produce two goods
(Pharmaceuticals and Garments) using two factors (capital and labor) and that
have identical preferences. The technology to produce each good is the same
in either country and allows for substitution among inputs. Garment
production is labor intensive while pharmaceuticals production is capital
intensive. Canada is capital abundant while Mexico is labor abundant country.
Answer the following question, justify fully using a clear explanation and
diagram and/or an equation in each case.

a) Draw possible production and consumption points under free trade for
Canada and Mexico. Identify exports and imports. (10p)

b) Show how the price of capital and price of labor change in Canada when
the country goes from autarky to free trade with Mexico (5p)

c) Show how the price of capital and price of labor change in Mexico when
the country goes from autarky to free trade with Canada (5p)

4) Suppose there are two countries, the U.S. and Colombia, and two goods,
Coffee and Movies. In the U.S., it takes 2 units of labor and 1 unit of capital to
produce a unit of Coffee (aLC = 2, aKC=1), whereas it takes 1 unit of labor and 5
units of capital to produce a Movie (a LM=1, aKM=5). The U.S. is endowed with 50
units of labor and 40 units of capital, while Colombia has 40 units of labor and 20
units of capital.
a) By the Heckscher-Ohlin Theorem, who will export Coffee and why? (5p)

b) Suppose that the price of Coffee is $15 and the price of Movies is $21 in the
U.S. Solve for the wage and price of capital in the United States. Show your work
to get credit. (5p)

c) Suppose the price of Movies goes up to $30 in the U.S., while the price of
Coffee remains at $15. Calculate what happens to wages and the price of capital.
Which theorem predicts this result? (5p)

5) Assume that Mexico receives an inflow of FDI. Suppose two factors

(labor and capital) are used in the production in two industries (food
and televisions). Further assume that televisions are capital intensive as
compared with food. Use the long-run model to answer the following
questions.
a) Draw a box diagram to show what happens to capital and labor of each
good? How has wage changed in terms of food and televisions?(10p)

b ) Show the impact of the inflow of FDI on Mexico in an illustration

with output of food (televisions) on the vertical (horizontal) axis. What
happens to the output of each good? (5p)

6) This is a table of imports and exports of commodities for the United States.
Product
Golf Clubs
Fax Machines
Men shorts

Value of Imports
million)
$305.8
$271.8
$701.3

($

Value of Exports
million)
$318.7
$150.2
$12.1

a) Calculate the intra-industry trade index for each product? (5p)

($

b) According to your result, which product represents inter-industry trade

and which product represents intra-industry trade ? Why ? (5p)

7) Mexico and Spain trade two commodities: flat panel computer monitors and
external hard drives (M and D). Their offer curves are given by the following
equations:

D = 0.40M2 + 1M

(Mexicos offer curve)

D = -0.20M2 + 10M

(Spains offer curve)

a) Determine the equilibrium terms of trade and each country's exports and
imports.(5p)

b) Illustrate your results graphically.(5p)