International Trade Policy

Assignment Ch04
ID__2022313686____ Name___장유리_______

1. 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.
(1) Which country would you expect to be relatively labor-abundant, and which
capital-abundant? Why?
Canada has relatively small population and level of development.
L_can / K_can < L_ind / K_ind
There is more capital per worker in Canada, making it capital-abundant. Then,
India would be la bor-abundant.

(2) Which industry would you expect to be relatively labor-intensive, and which
is capital-intensive? Why?
L_robot /K_robot < L_rug / K_rug, making robots capital intensive and rugs
labor intensive.

(3) Given your answers to (1) and (2), draw production possibilities frontiers
for each country. Assuming that consumer preferences are the same in both
countries, add indifference 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?

Canada’s no-trade production and consumption of robots and rugs

corresponds to a relative price of robots that is lower than that in India. This is
shown by the flatter sloped relative price line in Canada.
(4) 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.

2. In Lecture Note Figure 4-3, we show how the movement from the no-trade
equilibrium point A to a trade equilibrium at a higher relative price of
computers leads to an upward sloping export supply, from points A to D in
panel (b).
(1) Suppose that the relative price of computers continues to rise in panel (a),
and label the production and consumption points at several higher prices.
panel (a) that the relative price of the computer continues to rise and that the
production and consumption points are several higher prices higher.

(2) In panel (b), extend the export supply curve to show how the quantity of
exports at the higher relative prices of computers.
If the relative price of computers rises, exports of computers must initially rise
in the export supply curve, which means that when the global price is
(PC/PS)^ W1 = 1, Home exports 10 units, production is B_1, consumption is
C_1. But if prices rise, the export supply curve is likely to bend backwards. As
seen by the global price of (PC/PS) W2 = 1.5 with less than 10 units of export
supply, production is B2, consumption is C2. At this point, the consumption of
computers is in the 30 units and the production is in the 40 units, so exports
are in the 9s.

3. According to the standard Heckscher-Ohlin model with two factors (capital

and labor) and two goods, movement of Turkish migrants to Germany would
 decrease the amount of capital-intensive products produced in Germany.
Discuss whether this is true or false, and explain why.
True, Increasing the production factor increases the production of goods that
use that factor intensively and decreases the production of other goods.

Ch05

1. In the short-run specific-factors model, examine the impact on a small

country following a natural disaster like plague, earthquake, volcano or tsunami
that decreases its population substantially. Assume that land is specific to
agriculture, capital is specific to manufacturing, and labor is free to move
between the two sectors.
(1) In a diagram similar to Figure 5-2, determine the impact of the decrease in
work force on the output of each industry and the equilibrium wage.
It shows a decline in the population in a specific- factors model. The origin of
agriculture shifts inward by the exact amount of population change, carrying a
curve representing the labor marginal product of agriculture. The new
equilibrium is determined at the intersection of P_m ∙MPL_m and (P_a ∙
MPL_a)’ .It corresponds to a higher wage W. In manufacturing, labor volume
decreases from O_ml to O_ml’ and capital volume remains the same.
Production in manufacturing is reduced. In agriculture, labor volume decreased
from O_al to O_a’ l’

(2) What happens to the rentals on capital and land?

Natural disasters reduce the amount of labor in both industries, which increases
the marginal production of labor in both industries, decreases the marginal
production of industry-specific factors. Because it is a small country, the final
output prices, Pa and Pm, remain unchanged. And rental rate of the capital,
and rental rate of the land both decrease.
2. Suppose that computers use 2 units of capital for each worker, so that
Kc=2*Lc, whereas shoes use 0.5 units of capital for each worker, so that
Ks=0.5*Ls. There are 100 workers and 100 units of capital in the economy.
(1) Solve for the amount of labor and capital used in each industry.
Hint: the amount of labor and capital used in each industry must add up to the
total for the economy, so that:
Kc+Ks=100, and Lc+Ls=100
Use the facts that Kc=2*Lc and Ks=0.5*Ls to rewrite these equations as:
2 *Lc+0.5*Ls=100, and Lc+Ls=100
Use these two equations to solve for Lc and Ls, and then calculate the amount of capital
used in each industry using Kc=2*Lc and Ks=0.5*Ls.
Ls =100 / 1. 5 = 66. 7
Lc =33. 3, Kc= 2 *Lc = 66. 7 Ks = 0. 5 * Ls = 33. 3

(2) Suppose that the number of workers increases to 125 due to immigration,
keeping total capital fixed at 100. Again solve for the amount of labor and
capital used in each industry.
Ls =150 / 1. 5 = 100
Lc =25, Kc= 2 *Lc = 50. Ks = 0. 5 * Ls = 50

(3) Suppose instead that the amount of capital increases to 125 due to FDI,
keeping the total number of workers fixed at 100. Again solve for the amount
of labor and capital used in each industry.
Ls =75/ 1. 5 = 50
Lc =50, Kc= 2 *Lc = 100. Ks = 0. 5 * Ls = 25

(4) Explain how your results in parts (2) and (3) are related to the Rybczynski
theorem.
(a) Comparing parts (b), the increase in labor in the economy increases the
amount of labor and capital devoted to shoes and decreases the amount of
labor and capital devoted to computers, so shoes are labor intensive because
they use 0.5 units of capital per unit of labor, and computers are capital
intensive because they use 2 units of capital per unit of labor. So the change in
output is according to Rybczynski's theorem that increases the output of labor-
intensive goods and decreases the output of other goods.
On the contrary, comparing part (b) and part (d) showed an increase in the
amount of capital in the economy, consistent with Rybczynski's theorem, an
increase in the amount of labor and capital invested in computer production
and a decrease in the amount of labor and capital invested in shoe production.
3. Answer following arguments regarding Rybczynski Theorem by T (true)
or F (false)

(1) A country has a comparative advantage in the intensive use of

elements that are relatively abundant in that country, allowing it to

export those goods and import other goods. T

(2) International trade can equalize factor prices between countries

without direct movement of production factors between countries. T

(3) A rise in the price of a good increases the real price of the factors

of production used intensively to produce that good and reduces

the real price of other factors of production. T

(4) As the endowment of a certain production factor increases, the

absolute production of goods that use that production factor

intensively increases, and the absolute production of other goods

decreases. T