Chapter four problems Suggested solutions (I will post a link here after you've submitted your answers.)
1. Use a general equilibrium depiction of trade equilibrium in the HO model to prove that complete specialization in the production of exports will, in general, lower the standard of living of an economy relative to that found in free trade. (Hint: Use a common trade price to illustrate this -- parallel Terms of Trade lines -- even though only one of these lines will be tangent to the PPF.)
2. Some have argued that the factor price equalization theorem implies that American wages must fall to the level of those found in the least developed countries of the world. Comment on the validity of this statement.
3. Consider the following data on the factor endowments of two countries, A and B:
| Country | ||
| Factor Endowments | A | B |
| Labor force (millions of workers) |
45 | 20 |
| Capital stock (thousands of machines) |
15 | 10 |
| L/K (workers/machine) | _______ | _______ |
| K/L (machines/worker) | _______ | _______ |
Which country is relatively capital abundant? Which country is relatively labor abundant? Suppose that good S is capital intensive relative to good T. Which country will have comparative advantage in the production of S? Explain.
4. Compare and contrast the classical and HO theories of the commodity composition of trade. Discuss differences in assumptions, post trade production points, and the effects of trade on the distribution of income.
5. Australia is land abundant; India is labor abundant. Wheat is land intensive relative to textiles. Graphically demonstrate the pre- and post-trade equilibria between these two countries. Find and label the trade triangles for each. Which factors gain and which factors lose when trade arises between these two countries? Explain carefully.
6. One of the important changes in the world economy over the past three decades has been the rapid increase in capital investment in the countries of the Pacific Basin (notably Japan and Korea). What are the implications of this investment for the commodity patterns of trade of these two countries say with respect to the US? Explain carefully. (Hint, think about the Rybczynski theorem.)
7. Explain carefully why the assumption of identical technology worldwide eliminates the classical basis for international trade
8. Use the Rybczynski theorem to prove that the more dissimilar countries become in their factor endowments, the more likely is complete specialization to obtain once trade begins.
9. Answer the questions in exercise 3 using the following data on factor endowments of countries C and D:
| Country | ||
| Factor Endowments | C | D |
| Labor force (millions of workers) |
12 | 30 |
| Capital stock (thousands of machines) |
48 | 60 |
| L/K (workers/machine) | 250 | 500 |
| K/L (machines/worker) | 1/250 | 1/500 |
10. Based on the information in Item 4.2 and your knowledge of the HO model, what types of goods would you expect Kenya or India to have a comparative advantage in? What about Norway or Japan?
11. Suppose that country A is labor abundant. It can produce two goods, X and Y. Good X is capital intensive relative to good Y. (a) Derive A's PPF and determine the pretrade relative price of X in terms of Y. (b) Now, suppose that there is technological innovation that makes capital more productive in the X industry, but not in making Y. In a separate diagram, illustrate what would happen to A's PPF and explain your result. Show as well what would happen to the pretrade relative price of X in A. How might this affect A's trade patterns? Explain.
12. The assumption of identical tastes in the HO model increases the likelihood that comparative advantage will be determined by international differences in factor endowments. True or false? Explain.