Question 1

True/False Questions

a)  Consider a Ricardian world made of two countries, the U.S. and Mexico, and  two goods, cars and computers. If the U.S. is more productive than Mexico in  both cars and computers this means that the U.S. has a comparative advantage in both goods and gets to choose what it will export to Mexico and what it will import from Mexico. True or False? Explain.

b)  Assuming competitive input and output markets and diminishing marginal product of capital, the value of the marginal product of capital is the supply function of capital. True or False? Explain.

c)  When there are diminishing marginal returns to factors of production, the PPF is a negatively sloped straight line. True or False? Explain.

d)  Consider the case of the Specific Factors model that we considered in class   (given all the assumptions that we made in class). Under free trade, a country will only produce the good in which it has comparative advantage. True or    False? Explain.

e)   Consider the Specific Factors model that we discussed in class. In such a

model the owners of the abundant specific factor of production benefit from free trade. True or False? Explain.

Question 2

The Netherlands and Taiwan produce tulips (T) and cars (C).  Cars are produced      using capital and labor. Tulips are produced using land and labor. Labor is mobile   between sectors within a country. The Netherlands is relatively abundant in land,     while Taiwan is relatively abundant in capital. Consumers’ preferences are the same in The Netherlands and Taiwan.

a)  In the same diagram draw the relative demand and the relative supply of cars/tulips for each country in autarky. Explain any difference across      countries.

b)  In the diagram you have drawn for question 2a), show the autarky relative price of cars in The Netherlands and Taiwan.  Label them ()NLD  and     ()TwN , respectively.

Question 3

Continuing from question 2… Now, suppose Netherlands and Taiwan are free to trade.

a)  Describe the patterns of trade, i.e., which country exports what. Explain your

answer.

b)  Using a bucket diagram, show and discuss what happens to the allocation and  wage of labor in Taiwan as it adjusts from autarky to free trade. For simplicity, assume that the price of the good imported by Taiwan stays unchanged.

c)  How does free trade change the real returns to factors in Taiwan? Explain your answer in as much detail as possible.

Question 4

Consider a world with only two countries: Germany and France. The table below describes the labour endowments and production technologies for each country

a)   Given the information in the table above, create a table showing the labour input requirement (a) and the marginal product of labour (MPL) for each   country and good.

b)  Derive the PPF for Germany and France. Draw them. Be sure to label the numeric values of each country’s axes and slope.

c)  What is the opportunity cost of producing one more unit of wine in GER? in France?

d)  In autarky,

1.   what is the autarky price of wine relative to the price of cars in each country?

2.   what is the autarky price of cars relative to the price of wine in each country?

Now, suppose Germany and France are free to trade.

e)  Describe the pattern of trade.

f)   What happens to the composition of output in each country?