Economics 425, Summer 2016 (Total points:100)

Assignment #1: Due at the beginning of class on July 18, 2016

1. Discuss the reasons for the revival of trade that led to the period of the Second Golden Age. (9
points)
2. From Chapter 1, Question 1 ignore parts (a) and (i) and do parts (b) to (h) using the
information from the table with 2011 merchandise trade data that is already provided. [ This
question is from the third edition of the required textbook of Feenstra and Taylor]
(3*7=21points)
3. Use the following information from the table provided below to answer the questions below:

Italy Taiwan
Soft drink cans produced per hour 2
16
Snowboards produced per hour
4
8
a) Compute the range of the international relative price of soft drink cans at which the two
countries would trade. (5 points)
b) Suppose that discovery of a new method of production (technological progress) in Italy
doubles the marginal product of labor in snowboards. Would the two countries Italy and Taiwan
continue to trade? Provide a brief explanation. (5 points)
4) Use the following information to answer the questions below:

Assume that the Home and Foreign country produce two goods, televisions and cars.
a. What is the marginal product of labor for cars in the Home country? What is the no-trade
relative price of televisions at Home? (3 points)
b. What is the marginal product of labor for televisions in Foreign country? What is the no-trade
relative price of televisions in Foreign? (3 points)
c. Suppose the world relative price of televisions in the trade equilibrium is PTV / PC =1. Which
good will each country export? Briefly explain why. (3 points)
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 notrade equilibrium? (4 points)
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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? (4 points)
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 points)
5. Use the following information to answer the questions below. Use diagrams to help answer the
question where appropriate. Suppose that capital is used only in the production of computers and
land is used only in the production of barley; and that labour is perfectly mobile between
industries.

Holding the price of computers constant, suppose the percentage increase in the price of barley is
10% and the percentage increase in wage is 5%.
a. Determine the impact of the increase in the price of barley on the rentals on land. (5 points)
b. Determine the impact of the increase in the price of barley on the rentals on capital. (5 points)
c. Determine the impact of the increase in the price on the welfare of labor. (5 points)
d. Summarize your finding in the parts above using notational format. (Hint: in one line write the
relationship using inequality signs < or > to express how the real rental on capital, real wage and
the real rental on land are related altogether) (5 points)
e. If, instead of the situation given above, the price of computers was to fall, would landowners
or capital owners be better off? Explain. How would the decrease in the price of computers effect
labor? Explain. (5 points)
6. Suppose two countries, Canada and Mexico, produce two goods, timber and televisions.
Assume that land is specific to timber, capital is specific 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. In a graph similar to Figure 3-5, 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? (4 points)
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? (3 points)
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? (3 points)
d. In each country, has the specific factor in the export industry gained or lost, and has the
specific factor in the import industry gained or lost? (5 points)
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