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# International Economics Dr.

McGahagan Pugel -- Chapter 4 Problems
Problem 4.1. Heckscher-Ohlin and Production technologies According to Heckscher-Ohlin (in contrast with Ricardo) all countries have the same set of production technologies available to them. You can buy a backhoe to dig a ditch in Nanking or in Nanty Glo. The reason countries may make different choices from the same set of production technologies is that they have different factor prices, which in turn reflects the fact that they have different factor endowments. Differences in factor endowments are the basis for trade in the HO model. Problem 4.2. Zero sum game? Trade in the HO model, like trade in the Ricardian model, is a positive sum game. The welfare of the "representative consumer" in both countries increases as a result of trade. Problem 4.3. Factor abundance and factor intensity. Note that factor abundance relates to national endowments and factor intensity to industries. We compare factor abundances by comparing the ratios of two factors across countries: in this problem, the labor/land ratio in Pugelovia is 20 / 3 = 6.67 the labor/land ratio in ROW is 80 / 7 = 11.43 ROW is labor abundant and Pugelovia is land-abundant (since 3 / 20 is greater than 7 / 80) Since the labor-abundant country is expected to have a comparative advantage in the labor-intensive industry, we would expect the ROW to export cloth and Pugelovia to export wheat. Problem 4.4. Deriving a supply curve from a production possibility frontier. Consider an example similar to that in problem 9. Assume there are only 3 states in the US, namely Pennsylvania (PA), Iowa (IA) and South Dakota(SD). With the factor endowments present in these states, they can produce at a maximum: Maximum production of wheat PA IA SD 50 200 250 Maximum production of corn 150 200 100 Opportunity cost of corn 1/3 unit of wheat 1 unit of wheat 2.5 units of wheat

The supply curve can actually be drawn without drawing the PPF. Note that Pennsylvania is the low opportunity cost producer for corn, and therefore has a comparative advantage in corn. It will therefore be the first of the three states to produce corn. Suppose the price of wheat is one dollar a bushel (we will assume this remains constant). What will Pennsylvania do if the price of corn is 33 cents a bushel? 34 cents a bushel? (at 33 cents a bushel, it would make 0.33 * 150 = \$ 49.50 from corn production and \$ 1 * 50 = \$ 50 from wheat production, so it would produce wheat; at 34 cents a bushel, it would make 0.34 * 150 = \$ 51 from corn production, so it would produce corn). At a price of 33.33 cents or greater, PA produces 150 units of corn -- our first point on the supply curve for corn. What price for corn gets Iowa to switch to corn production? What is total US corn production when PA and IA both produce corn? (answer: \$ 1 and 350, so we have a second point on our supply curve for corn). What price for corn gets South Dakota to switch to wheat production? What is total US production? (answer: \$ 2.5 and 450, so we have a third point on our supply curve for corn).

wheat / P.corn / P.wheat/P. for a US total of 500 wheat and zero corn [Note that this means that P.00 but less than \$ 3.P.142 counties (the number of counties in the US).40.00 but more than 0.00 a bushel. so Pennsylvania drops corn production] -. You should see that if --P.P. not just on its dollar price. so that (for example) some farmer in Pennsylvania has land which cannot be used to grow wheat.00. If we construct an example with 3.P. and can be justified if we assume that production conditions differ WITHIN each of the states. so he will grow corn at any positive price. The 3-state PPF example is reproduced on the next page. .corn more than \$ 1.wheat / P.corn is less than 1.Problem 4 (continued) Hence our supply curve for corn is (if we connect the points directly) or. -. for a US total of zero wheat and 450 corn These points ARE the points of the production possibility frontier of the country taken as a whole. it will look very curved indeed. -. for 250 wheat and 350 corn.wheat is less than 1 / 3. the rising price of corn will drive farmers out of wheat and into corn. If we construct an example with 50 states. the PPF would look even more curved. even SD switches to corn. all producers produce wheat. only SD produces wheat. for 450 wheat and 150 corn (only PA produces corn). SD and IA produce wheat.40. What about the supply of wheat? Note that even if the price of wheat stays at \$ 1.corn = \$ 3.00 or more.wheat / P. so the PPF graph (on the next page) looks more like a Heckscher-Ohlin PPF rather than a Ricardo PPF. if we use a step function (which more literally translates our numbers into a graph): The graph on the left looks more like what we are used to seeing as a supply curve. The supply of wheat depends on its price RELATIVE TO corn.corn is less than 0.