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HOMEWORK ASSIGNMENT 1, Summary of student issues
发布时间：2024-06-20
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HOMEWORK ASSIGNMENT 1, Summary of student issues
Problems 1 and 2: empirical [week 1]
Most students did these problems correctly. A few reminders:
● Normalize your quantities when you want to compare values over time and/or across countries or products
o Normalize by GDP to eliminate growth-related changes
o Use shares to determine the importance of each trading partner/product
● Do not provide generic answers: answer the questions using your PARTICULAR data/example.
Problem 3. (Ricardian model) [week 2]. Most students completed parts a)-d) correctly. A few of you missed the part that asked you to put apples in the x-axis. Please, read the questions
carefully!
Part e) asks you to CONSTRUCT the RS curve, so you should explain why it looks the way it does, and not just plot it. Here you should indicate the production pattern for all possible relative prices and the corresponding relative quantities produced at those prices.
Be mindful of the fact that, when the relative price is equal to the opportunity cost in one of the countries, that country is indifferent between producing both goods, so it can produce a range of values (this is why the RS is a flat segment at those prices!)
1. If 0 < PA / PB < 3 / 2 :
● Home produces only bananas
● Foreign produces only bananas
● Relative supply of apples:
2. If PA / PB = 3 / 2 :
● Home produces any feasible combination of apples and bananas
● Foreign produces only bananas
● Relative supply of apples:
3. If 3 / 2 < PA / PB < 5 :
● Home produces only apples
● Foreign produces only bananas
● Relative supply of apples:
4. If PA / PB = 5 :
● Home produces only apples
● Foreign produces any feasible combination of apples and bananas
● Relative supply of apples:
5. If PA / PB > 5 :
● Home produces only apples
● Foreign produces only apples
● Relative supply of apples:
Part f) Some students missed this part: you actually need to PLOT the RD curve to figure out the equilibrium price. Recall that RD can cross the RS in one of the flat segments OR in the vertical segment. To figure out where it crosses, you can do ONE of the following:
● Find two points of the line and then join them: the best option is to evaluate the RD at the two price thresholds (the two opportunity costs). Once you join the points you will see where it crosses the RD
● Determine the relative price at which the relative demand is exactly equal to the RS at its vertical segment. This will tell you the position of the RD at that relative supply.
o If that price is in between the two opportunity costs, then the RD crosses the RS in the vertical segment and that is the equilibrium price
o If the price is NOT in between the two thresholds, then the RD will cross in one of the two horizontal segments (you can figure out which one, depending on the value of the relative price)
Please, make sure that you plot the graphs that are given to you in the problem, and not generic graphs!
Problem 4. (Specific Factors Model) [week 3] Most students had issues solving this problem. I suspect that most of the issues arose because the students had not reviewed Module 3 before solving the problem. Please, review this module for the test!
Part a). This part was algebraic. You were asked to write LM, LF, L*M, L*F, in terms of the
relative price of manufactures in each country, PM / PF and P*M / P*F. For this you needed to use the three conditions that need to be satisfied for the labour market to be in equilibrium:
(1) PM .MPLM = W
(2) PF . PMLF = W
(3) LM + LF = L , where L is the endowment of labour in the country.
NOTE: you could combine (1) and (2) into PM .MPLM = PF . PMLF .
In the end, you will find expressions for all the labour demands in terms of numbers, the relative price PM/PF and the labour endowments L and L*.
Quite a few of you made algebra mistakes here, basically from operating negative exponents incorrectly!
If you follow these steps you obtain:
Home:
Foreign:
Part b) Here you need to use that RS = QM / QF. You could either:
● Replace the expressions in a) in the technology formulas and simplify, or
● Write RS in terms of LM/LF and then use the expression ofLM/LF in terms of relative
prices that you obtained while during the derivations in a) (this option is easier in terms of the algebra)
Following these steps you obtain:
Be mindful that, in your graphs you have the relative prices in the y-axis. To properly plot the curves, then you need to isolate the relative prices in the formulas above.
The rest of the parts are very similar to the tutorial problem that I solved last week.
A few reminders:
● You need to plot the graphs if the question asks you to do it. Just giving generic answers without showing them in the graphs will give you no marks.
● Your answers need to be consistent with your graphs. Quite a few of you had graphs saying one thing and your text saying something very different.
● Welfare gains from trade: In the models we have covered, countries gain from trade because trade expands the consumption possibility frontier beyond the PPF. In models with more than one factor, you cannot justify gains from trade by changes in “returns”, since returns to different factors go in different directions.
● Answer intuition and policy questions using the model in the question, and not using generic answers from the internet (or other sources).
