Labor required One computer One sack of rice in N in S 40 20

Transcription

1 Solutions Seminar 6

2 2 a) Labor required One comuter One sack of rice in in S The revenue from adding an extra worker to the comuter industry is P c /10 while the revenue from adding an extra worker to the rice industry is P r /15. If the relative rice of comuters to rice were smaller than 2:3, we would have c r c < = 3 15 < r 15 That is, revenue in the comuter industry would be less than in the rice industry. As a consequence, there would not be any comuter roduction. 2

3 If the relative rice of comuters to rice were higher than 2:3, we would have c r c > = 3 15 > r 15 That is, revenue in the comuter industry would be higher than in the rice industry. As a consequence, there would not be any rice roduction. 2b) This knife-edge behavior follows from the fact that the roduction ossibility frontier is a straight line in this case. In the H-O model, the roduction ossibility frontier is bowed out, which allows a whole range of rice ratios to be consistent with the roduction of both goods.

4 Production ossiblity frontiers- Ricardian Model rice rice Country orth Country South comuters 15 comuters 4

5 Production ossiblity frontiers Heckscher-Ohlin Model We know that orth will have a comarative advantage in the x-axis good whenever the sloe of the PPF is less stee comared with South. In the Ricardian model the PPF is less stee all the way, so orth will always have a comarative advantage indeendent of how much is roduced. In the H-O model the sloe of the PPF deends on the roduction mix of the two goods. 5

6 orth will have a coarative advatage in Cars roduction until the oint P. Beond this oint it is more exensive for orth to roduce Cars than South.

7 2c) Same intuition as 2a) The autarkic rice of comuters to rice must be 2:1. If both goods are going to be roduced: 2/3 < c / R < 2 Why? If c / R < 2/3 <2, both countries secialize in rice If c / R >2 >2/3, both countries secialize in comuters If 2/3 < c / R < 2 orth secializes in comuters and South in rice 3) The rice ratio 1:1 means that comuters will be roduced in, and rice in S. Only labour is a factor of roduction, so that all revenues are aid to workers. This means that the wage rate will equal revenue er worker. w = $100/10=$10 w S = $100/20=$5

8 4a) An increase in the relative rice of cars will cause labor and caital to leave the textile sector and go to the car sector. Since ca roduction is more caital intensive than textile roduction, the ratio of labor to caital released by the textile industry will be higher than that demanded by the car industry. In order for the car industry to absorb labor and caital in this roortion, the ratio of wages to caital income will need to fall.

9 Damand and suly for caital and labour r Suly caital w Suly labour K L 9

10 4b) If the ratio of caital to wage income goes u, then the caital-intensive industry will be worse off than the labour-intensive industry. In this case, the car industry will be worse off. 4c) The initial change that makes car roduction more rofitable than textile roduction (the increase in relatice rice) endogenously changes factor rices so that textile roduction will remain rofitable.

11 6a) For a given level of roduction of bread and wine, each firm has a constant returns to scale tecnology available. There is only one inut, labor, which means that the PPF is a straight line.

12 6b) In the economy as a whole, shifting one unit of labour from wine roduction to bread roduction reduces wine roduction for two reasons: there are less workers roducing wine, and those who remain are less roductive. In addition, as bread roduction increases, each additional worker becomes more and more roductive. This means that shifting one worker from wine to bread when all resources are in wine will increase bread roduction by less than a similar shift when most resources are in bread roduction.

13 6c) Both countries consume goods in fixed roortions, which means that with no trade, roduction will be in an internal oint on the PPF. Under trade, a rice level that exchanges B units of wine for A units of bread will allow both countries to reach a higher indifference curve. There are two equilibria of this kind: one for each srcialization attern. The situation at which each country remains the same as in autrky is also an equilibrium, as no country has any axcess roduction that it is willing to trade. If roduction deviates from this oint, it creates an incentive for the other country to change roduction in the other direction. In this sence, it is an unstable equilibrium

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