作业3

ECON2252 Theory of Internation Trade
Tutorial 3 Problem set
SpeciÖc Factor Model
1 Question 1
An economy can produce good 1 using labor and capital and good 2 using labor and
land. The total supply of labor is 100 units. Given the supply of capital, the outputs
of the two goods depend on labor input as follows:
Labor input Output Labor input Output

to Good 1 of Good 1 to Good 2 of Good 2
0 0.0 0 0.0
10 25.1 10 39.8
20 38.1 20 52.5
30 48.6 30 61.8
40 57.7 40 69.3
50 66.0 50 75.8
60 73.6 60 81.5
70 80.7 70 86.7
80 87.4 80 91.4
90 93.9 90 95.9
100 100 100 100
a Graph the production function for good 1 and good 2.
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Answer:
b Graph the production possibility frontier. Why is it curve?
Answer:
The curve in the PPF reáects diminishing returns to labor. The production of
good 1 uses labor and capital, while the production of good 2 uses labor and
land. The amount of capital and land is Öxed in each sector, while labor can
move from one sector to the other.
As production of good 1 increases, the opportunity cost of producing an additional

unit of good 1 will increase. So if there is an increase in the number of work-
ers producing good 1 with a Öxed capital supply, each additional worker will
contribute less to the production of good 1 and this represents an increasingly
large loss of potential production of good 1. The curve related to labor input
to output gets áatter at higher levels of employment.
The two curves intercepts at L1 = 50;and L2 = 50:The M P L1 (50) = 10, and
M P L1 (50) = 7:8; M P L2 (50) = 6:0:
d Calculate the e§ects of the price change from 2 to 1.3 on the income of the speciÖc
factors in sectors 1 and 2.
Answer: Wage rate equals in two sectors.
4w1 = M P L1 (50)  P1  M P L1 (30)  P1 : 4w1 = 2:2P1

4w2 = M P L2 (70)  P2  M P L1 (30)  P20 : 4w1 = 6  1:3P1  5  2P1 = 2:2P1 :
3 Question 3
Consider two countries (Home and Foreign) that produce goods 1 (with labor and
capital) and 2 (with labor and land) according to the production functions described
in problems 1 and 2. Initially, both countries have the same supply of labor (100 units
each), capital, and land. The capital stock in Home then grows. This change shifts
out both the production curve for good 1 as a function of labor employed (described in
problem 1) and the associated marginal product of labor curve (described in problem
2). Nothing happens to the production and marginal product curves for good 2.
a Show how the increase in the supply of capital for Home a§ects its production
possibility frontier.
Answer: The increase in the capital stock in Home will increase the possible pro-
duction of good 1, but have no e§ect on the production of good 2 because good
2 does not use capital in production. As a result, the PPF shifts out to the
right, representing the greater quantity of good 1 that Home can now produce.
b On the same graph, draw the relative supply curve for both the Home and the
Foreign economy.
Answer: Given the increased production possibility for Home, the relative supply
of home (deÖned as Q1/Q2) is further to the right than the relative supply for
Foreign. As a result, the relative price of good 1 is lower in Home than it is in
Foreign.
c If those two economies open up to trade, what will be the pattern of trade (i.e.,
which country exports which good)?
Answer: If both countries open to trade, Home will export good 1, and Foreign will
export good 2.
d Describe how opening up to trade a§ects all three factors (labor, capital, land) in
both countries.
Answer: Owners of capital in Home and owners of land in Foreign will beneÖt from
trade, while owners of land in Home and owners of capital in Foreign will be
hurt. The e§ects on labor will be ambiguous because the real wage in terms of
good 1 will fall (rise) in Home (Foreign) and the real wage in terms of good 2
will rise (fall) in Home (Foreign). The net welfare e§ect for labor will depend on
preferences in each country. For example, if labor in Home consumes relatively
more of good 2, they will gain from trade. If labor in Home consumes relatively
more of good 1, they will lose from trade.
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ECON2252 Theory of Internation Trade

Tutorial 3 Problem set

SpeciÖc Factor Model

Labor input Output Labor input Output

a Graph the production function for good 1 and good 2.

b Graph the production possibility frontier. Why is it curve?

As production of good 1 increases, the opportunity cost of producing an additional

Answer: Wage rate equals in two sectors.

4w1 = M P L1 (50)  P1  M P L1 (30)  P1 : 4w1 = 2:2P1

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