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Homework 3

UCDavis, 160a, Winter 2008 Prof. Farshid Mojaver

The Specific Factors Model and Factor Movement 1. Suppose that there are three fa tors! Capita", #a$or, and #and. %read re&uires inputs of "and and "a$or, 'hi"e stee" re&uires apita" and "a$or. a. Whi h fa tors are (o$i"e and 'hi h are spe ifi ) b. *ssu(e that Canada+s endo'(ents of "and and apita" are 10 units of apita" and 100 "and, 'hi"e the U.S.+s are ,0 units of apita" and 100 "and. Whi h -ood does ea h ountr. e/port) Wh.) c. 0o' does trade affe t the returns to "and, "a$or, and apita" in the U.S. and in Canada) 1%e sure to provide the detai"s on 'hose rea" in o(es -o up or do'n, 'hi h pri es -o up or do'n in 'hi h ountries, and, if the effe ts are indeter(inate, then e/p"ain 'h..2 2. 3n the spe ifi fa tors (ode", a-ain suppose that the re"ative pri e of (anufa tured -oods de reases. 4hat is, assu(e that the pri e of a-ri u"tura" -oods in reases 'hi"e the pri e of (anufa tured -oods is un han-ed 1i.e. 5P*6P* 7 0 and 5PM6PM 8 02. *rran-e the fo""o'in- ter(s in as endin- order! 594694 59:69: 5P*6P* 5PM6PM 5W6W

3. Ma;e an ar-u(ent that a2 there is tenden . for "a$or to (i-rate fro( the rest of the 'or"d to US $2 (i-ration i(proves US <DP $ut "o'ers the <DP of the 9=W 2 (i-ration is $enefi ia" for the (i-rants $ut huts 'or;ers in the host ountr. d2 o'ners of "and6 apita" in the host ountr. are $etter of as a resu"t of "a$or (i-ration e2 the 'or"d as a 'ho"e is $etter as a resu"t of (i-ration 4. 3n the spe ifi fa tors (ode" for (anufa turin- -oods and a-ri u"ture, onsider a de rease in the sto ; of "and. For e/a(p"e, suppose natura" disaster de reases the &uantit. of ara$"e "and for p"antin- rops. a2 9edra' Fi-ure ,.12 startin- fro( the initia" e&ui"i$riu( point *. $2 What is the effe t of this han-e on the &uantit. of "a$or in ea h industr. and on the e&ui"i$riu( 'a-e) 2 >o' suppose that internationa" o((unit. 'ants to he"p the ountr. stru ; $. the natura" disaster and de ides to do so $. in reasin- its "eve" of FD3. 4hat is, the rest of the 'or"d in reases its invest(ent in a" apita" in the stri ;en ountr.. What is the effe t of this po"i . on the e&ui"i$riu( 'a-e) What is the tota" effe t on the e&ui"i$riu( 'a-e of the disaster and su$se&uent FD3 invest(ent 13n rease, de rease or a($i-uous2) Does the a-ri u"ture industr. $enefit or "ose fro( the FD3)

5. >o' onsider a "on-?run (ode" for a ountr. produ in- 2 produ ts 1di-ita" a(eras and $as;ets2 usin- 2 fa tors 1 apita" and "a$or2. a2 Whi h -ood 'ou"d .ou e/pe t to $e apita"?intensive) Whi h -ood 'ou"d .ou e/pe t to $e "a$or?intensive) Wh.) $2 Suppose that forei-n o'ners of do(esti apita" de ide to de rease their invest(ent. 3""ustrate the effe ts of this han-e in a $o/ dia-ra(. Does output in ea h industr. in rease, de rease or sta. the sa(e) Do 'a-es in rease, de rease, or sta. the sa(e in ea h industr.) . Fi-ure ,.1@ is a supp". and de(and dia-ra( for the 'or"d "a$or (ar;et. Consider a situation 'here Forei-n 'or;ers i((i-rate to the ho(e ountr., ausin- the 0o(e 'a-e to de rease to !>AW 7 !"# and 'here the Forei-n 'a-e $e-ins at !$ and in reases to !>AW 7 !". a2 3s this a sta$"e out o(e in the "on- run) 4hat is, 'ou"d .ou e/pe t this pattern of i((i-ration to sta. the sa(e, to reverse, or to stop at the ne' 0o(e and Forei-n 'a-es) $2 <oin- fro( o"d 'a-es to the ne', are there -ains that a rue to the 0o(e ountr.) *re there -ains that a rue to the Forei-n ountr.) 3f so, redra' the -raph and identif. the (a-nitude of the -ains for ea h ountr.. 3f not, sa. 'h. not.