Rishi Chhagan

46108130
1)a)False
As Price of Manufacturing (Pm) goes up, Labor of Manufacturing(Lm)
increases so that the Marginal Product of Capital (MPKm). This means the
rental for capital goes up. Capital Owners can afford to buy more of both
goods so they are better off. The relative rise in price of manufacturing on
agriculture means that capital owners gain more than land owners.

b)True
None of the factors of productions will change as the relative price (the slope
on line tangent Homes PPF). There will be no change in Utility

2)

Consider the Specific Factors model of trade. Take a country, Sweden, that produces two goods,
Furniture (F) and Meatballs (M). Production in each sector requires capital (K), which is
perfectly mobile across sectors, and labor which has skills specific to each sector: carpenters
(LF) can only produce Furniture and cooks (LM) can only produce Meatballs

a) i)

ii) The relative price of Meatballs will have an increase in the marginal
product of capital of cooks. There is an ambiguous effect on the real
wage.
b) i)
 Rishi Chhagan
46108130

ii) Sweden has a

comparative
advantage in Furniture as the price remained unchanged when they
opened to trade and the price of meatballs fell. The relative price of
Furniture is higher although and this shows the comparative advantage
iii) It is exporting furniture and importing meatballs

iv)More capital since it is mobile will be put into producing furniture,

the number of carpenters will be the same, and MPL will increase.
The number of cooks remain the same but the capital stock will
reduce.

v)The real return of capital of meatballs decreases and the real return
of capital of furniture increases. The real wage of both carpenters and
cooks will increase but carpenters will gain more than cooks.

vi) They as a whole gain from trade, yes

vii) Cooks and labor associations will not be happy with trade

c) i) Production of Furniture increases at a point where MPL may not be

efficient (i.e. diminishing returns). Production of Meatballs will also
increase.
ii) Benefit the capital owners and it will not benefit the carpenters and
the native cooks.

3a) From the data shown, Netherlands (NLD) is both more labor and capital
abundant.

b) In 2007 for the textiles industry, Portugal is more labor intensive than
Netherlands (EMP). Netherlands is more Capital intensive as a whole , but
less capital intensive in the specific textile industry. Portugal can be seen as
more labor intensive. Ranking of sectors is different in both countries