ECO304: International Trade Tutorial 5
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ECO304: International Trade
Tutorial 5
SECTION A
Please give a short answer. Indicate whether the statement is true or false and give an explanation for your answer. Answer all questions.
A1. In contrast to the Ricardian model, international trade in the specific-factors model will lead to gains for some resources and losses for other resources. True or False? Explain.
A2. Suppose that the home country in the specific-factors model has a comparative advantage in agricultural output. Through international trade, workers will be better off. True or False? Explain.
A3. The specific factors model suggests that wages and rentals should equalize across countries as a consequence of international trade. True or False? Explain.
A4. The Heckscher–Ohlin Model assumes that factor endowments are the same in the two countries. True or False? Explain.
SECTION B
B1: Use the following figure to answer the questions below:
Assume the price range is such that both goods are produced, and there is no factor substitution.
a) What is the range for the relative price of cloth such that the economy produces both cloth and food? Which good is produced if the relative price is outside of this range?
b) Write down the unit cost of producing one yard of cloth and one calorie of food as a function of the price of one machine-hour, r, and one work-hour, w. In a competitive market, those costs will be equal to the prices of cloth and food. Solve for the factor prices r and w.
c) What happens to those factor prices when the price of cloth rises? Who gains and who loses from this change in the price of cloth? Why? Do those changes conform to the changes described for the case with factor substitution?
2022-06-01