I. The Ricardian Model

1. Answer the questions below using the information given by the following table.

Home Foreign Absolute

country country advantage

Number of bicycles

produced per hour 4 2 ?

Number of snowboards

produced per hour 6 8 ?

Comparative advantage ? ?

a. Complete the above table.

b. Which country has an absolute advantage in the production of bicycles?

c. Which country has an absolute advantage in the production of snowboards?

d. What is the opportunity cost of bicycles in terms of snowboards at Home? What is the

opportunity cost of bicycles in terms of snowboards in Foreign?

e. Which product will Home export and which product will Foreign export? Briey explain

why.

2. Assume that Home and Foreign produce two goods, televisions and cars, and use the

following information to answer the questions.

In the no-trade equilibrium

Home country Foreign country

WageTV

= 12 WageC

=? Wage

TV

=? Wage

C

= 6

MPLTV

= 2 MPLC

=? MPL

TV

=? MPL

C

= 1

PTV

=? PC

= 4 P

TV

= 3 P

C

=?

a. What is the marginal product of labor for televisions and cars in the Home country?

What is the no-trade relative price of televisions at Home?

b. What is the marginal product of labor for televisions and cars in Foreign? What is the

no-trade relative price of televisions in Foreign?

c. Suppose the world relative price of televisions in the trade equilibrium is PTV =P

C

= 1.

Which good will each country export? Briey explain why.

d. In the trade equilibrium, what is the real wage at Home in terms of cars and in terms

of televisions? How do these values compare with the real wage in terms of either good in the

no-trade equilibrium?

e. In the trade equilibrium, what is the real wage in Foreign in terms of televisions and in

terms of cars? How do these values compare with the real wage in terms of either good in the

no-trade equilibrium?

f. In the trade equilibrium, do Foreign workers earn more or less than those at Home,

measured in terms of their ability to purchase goods? Explain why.

3. Why do some low-wage countries, such as China, pose a threat to manufacturers in

industrial countries, such as the United States, whereas other low-wage countries, such as Haiti,

do not?

II. The Specic-Factors Model

4. In the specic-factors model, assume that the price of agricultural goods decreases whereas

the price of manufactured goods is unchanged (PA=P

A < 0 and PM =PM = 0). Arrange the

following terms in ascending order:

RT =R

T RK =R

K PA=P

A PM =PM W=W

5. Suppose two countries, Canada and Mexico, produce two goods, timber and televisions.

Assume that land is specic to timber, capital is specic to televisions, and labor is free to

move between the two industries. When Canada and Mexico engage in free trade, the relative

price of televisions falls in Canada and the relative price of timber falls in Mexico.

a. Using a graph, show how the wage changes in Canada because of a fall in the price of

televisions, holding constant the price of timber. Can we predict that change in the real wage?

b. What is the impact of opening trade on the rentals on capital and land in Canada? Can

we predict that change in the real rentals on capital and land?

c. What is the impact of opening trade on the rentals on capital and land in Mexico? Can

we predict that change in the real rentals on capital and land?

d. In each country, has the specic factor in the export industry gained or lost, and has the

specic factor in the import industry gained or lost?

III. The Heckscher-Ohlin Model

6. This exercise uses the Heckscher-Ohlin model to predict the direction of trade. Consider

the production of hand-made rugs and assembly line robots in Canada and India.

a. Which country would you expect to be relatively labor-abundant, and which capital-abundant? Why?

b. Which industry would you expect to be relatively labor-intensive, and which is capital-intensive? Why?

c. Given your answers to (a) and (b), draw production possibilities frontiers for each country.

Assuming that consumer preferences are the same in both countries, add indierence curves

and relative price lines (without trade) to your PPF graphs. What do the slopes of the price

lines tell you about the direction of trade?

d. Allowing for trade between countries, redraw the graphs and include a trade triangle

for each country. Identify and label the vertical and horizontal sides of the triangles as either

imports or exports.

7. Leontief’s paradox is an example of testing a trade model using actual data observations.

If Leontief had observed that the amount of labor needed per $1 million of U. S. exports was

100 instead of 182, would he have reached the same conclusion? Explain.

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8. Assume that only two goods are produced and consumed in the world economy, shoes and

computers. Suppose that there are drastic technological improvements in shoe production at

Home such that shoe factories can operate almost completely with computer-aided machines.

Consider the following data for the Home country:

Computers: Sales revenue = PC QC

= 100

Payments to labor = WLC

= 50

Payments to capital = RKC

= 50

Percentage increase in the

price = PC =P

C = 0%

Shoes: Sales revenue = PS QS

= 100

Payments to labor = WLS

= 5

Payments to capital = RKS

= 95

Percentage increase in the

price = PS =P

S = 50%

a. Which industry is capital-intensive? Is this a realistic scenario (i. e. , are some industries

capital-intensive in some countries and labor-intensive in others)?

b. Given the percentage changes in output prices above, calculate the percentage change in

the rental on capital.

c. How does the magnitude of this change compare with that of labor?

d. Which factor gains in real terms, and which factor loses? Are these results consistent

with the Stolper-Samuelson theorem?

9. In 2008, the Ukraine successfully negotiated terms to become a member of the World

Trade Organization. Consequently, countries such as those in Western Europe are shifting

toward free trade with the Ukraine. What does the Stolper-Samuelson theorem predict about

the impact of the shift on the real wage of unskilled labor in Western Europe? In the Ukraine?

10. According to the Heckscher-Ohlin model, two countries can equalize wage dierences by

either engaging in international trade in goods or allowing skilled and unskilled labor to freely

move between the two countries. Discuss whether this is true or false, and explain why…