604 ps2

1 Econ 604 International Trade: Problem Set 2 Due date: 11:59pm, Oct. 6th. 2023. Reference: Ch.5 and 6 1 Resources and Trade: The Heckscher-Ohlin Model (40pts) 1. (5pts) In the United States where land is cheap, the ratio of land to labor used in cattle raising is higher than that of land used in wheat growing. But in more crowded countries, where land is expensive and labor is cheap, it is common to raise cows by using less land and more labor than Americans use to grow wheat. Can we still say that raising cattle is land-intensive compared with farming wheat? Why or why not? (a) No. In this case, wheat production is land-intensive because the land to labor ratio for cattle production is lower than in America. (b) Yes. As long as the ratio of land to labor for cattle production exceeds the ratio in wheat production in that country. (c) Yes. Factor intensity depends on the ratio of land or labor to the output of the good, whichever is higher is the intensively used factor. (d) No. Since labor is abundant in crowded countries, cattle production will be labor-intensive. 2. (5pts) In the accompanying diagram the curves labeled SB and CC show, for soybeans and cigars respectively, how the land-labor ratio chosen for each good’s production varies with the wage-rental (w / r) ratio.

From the intersection points of the CC and SB curves with the ( w / r ) line it can be deduced that are the good. (a) soybean; land-intensive (b) soybean; labor-intensive (c) cigars; land-intensive (d) both; land-intensive 3. (5pts) Whether an economy engages in trade or remains closed, it will always be true that the value of its consumption must equal the value of its production. Suppose that an economy produces manufactured goods (M) and food (F). This requirement is indicated by the expres- sion: (1.1) ( P M  D M ) + ( P F  D F ) = ( P M  Q M ) + ( P F  Q F ) where P M is the price of manufactured goods, P F is the price of food, D M is the domestic con- sumption of manufactured goods, D F is the domestic consumption of food, Q M is the domestic production of manufactured goods, and Q F is the domestic production of food. Assuming this country, Canada, engages in trade and ends up importing food, which of the following expressions reveals its import of food, ( D F − Q F ) ? (a) ( P F / P M )  ( D F − Q F ) . (b) − P M  ( Q M − D M ) . (c) ( P M / P F )  ( D M − Q M ) . (d) − P F  ( Q F − D F ) .

6. (5pts) According to the model above, the establishment of trade between two countries will ultimately bring (a) an equalization of both the relative prices of goods and factor prices. (b) an equalization of factor prices but a continued difference in the relative prices of goods. (c) continued differences in both the relative prices of goods and factor prices. (d) an equalization of the relative prices of goods but a continued difference in factor prices. 7. (5pts) Suppose the United Colonies (a hypothetical country) happens to be the world’s most capital-abundant country. According to the factor-proportions (aka Heckscher-Ohlin) model, the U.C. would be expected to (a) export capital-intensive goods and import labor-intensive goods. (b) export labor-intensive goods and import capital-intensive goods. (c) export capital goods and import consumer goods. (d) export expensive goods and import inexpensive goods. 8. (5pts) The United States’ imports from 1945 through 1970 were more capital-intensive than its exports. One would have expected that the United States would have imported more labor- intensive goods and exported capital-intensive goods during this period. During the time pe- riod 1945-1970 the U.S. exported more (a) land-intensive goods. (b) unskilled labor-intensive goods. (c) technologically-intensive goods. (d) capital-intensive goods.

2 The Standard Trade Model (60pts) 1. The graph below depicts an economy, Home, which produces flowers and soybeans. Its pro- duction possibilities frontier is shown as TT. One of Home’s isovalue lines is also shown as X. Home exists and trades with a second country, Foreign, which also produces flowers and soybeans. • (5pts) Assume that Home is maximizing its value of output. Identify the point that it does so and label it with an X. • (5pts) Also assume that Home consumers maximize their utility. The indifference curve for Home is labeled IC. Identify the point of consumption by Home consumers that will do so. Label this point Z. 2. (5pts) Which of the following statements is true about the result above? (a) Home imports 18 units of soybeans. (b) Home imports 8 units of soybeans. (c) Home imports 8 units of flowers. (d) Home exports 8 units of flowers.

5. Originally the Home economy produced along T T . Home then experienced growth that caused its PPF to shift to T T 2 . The Relative Demand and Supply of Flowers is shown to the right and depicts the equilibrium of markets for computers and flowers when Home operated on its production possibilities frontier, T T . • (5pts) Draw the new relative supply curve and label it RS 2 . • (5pts) Identify the new equilibrium point in this market and label it Z . 6. (5pts) Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Determine the impact on Japan’s terms of trade of the following events: (a) A war in the Middle East disrupts oil supply: deteriorates / improves terms of trade. (b) Korea develops the ability to produce automobiles that it can sell in Canada and the United States: deteriorates / improves terms of trade. (c) U.S. engineers develop a fusion reactor that replaces fossil fuel electricity plants: deteriorates / improves terms of trade. (d) A harvest failure in Russia: deteriorates / improves terms of trade. (e) A reduction in Japan’s tariffs on imported beef and citrus fruit: deteriorates / improves terms of trade.

7. The graph below depicts the relative world demand and supply curves for flowers. Home cur- rently exports the labor intensive flowers and Foreign exports the land intensive soybeans. The current equilibrium in the market occurs at point X. Recall that the relative quantity of flowers is computed as Q F + Q F  / Q S + Q S  , while the r elativ e pr ice of flo w ers is computed as P F / P S . Suppose that Home places an import tariff on soybeans. • (5pts) Draw the new relative demand curve. Label it RD 2 . • (5pts) Draw the new relative demand curve. Label it RS 2 . • (5pts) Plot the new market equilibrium point indicating the new terms of trade. Label the point Z . 8. (5pts) The impact on the terms of trade of an import tariff depends on (a) how large of a tariff is placed on the good. (b) how large a tariff imposing country is to the rest of the world. (c) how many countries produce the good. (d) the number of units of the good available.