1. Consider the Specific Factors model with two countries, Home and Foreign, with two goods, cloth (c) and food (f), and three factors, capital K, labour L and land T. The production functions are given by F.(Ke, Le) = Kề Lề and F7(Lf,T;) = LT}.
1. Consider the Specific Factors model with two countries, Home and Foreign, with two goods, cloth (c) and food (f), and three factors, capital K, labour L and land T. The production functions are given by F.(Ke, Le) = Kề Lề and F7(Lf,T;) = LT}.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:1. Consider the Specific Factors model with two countries, Home and Foreign, with two
goods, cloth (c) and food (f), and three factors, capital K, labour L and land T.
The production functions are given by
1
1
F.(Ke, Le) = Kề Lề and F;(Lf, Tf) = LT.
That is, capital is specific to cloths and land to food. Suppose that the countries'
factor endowments are K"
1
KF, LH
1 and LF
1, and TH
1 and
T = 1/2, so that the total labour force is 1 in both countries. The price of capital is
denoted by r, the price of land by q and the price of labour by w. Denote the goods'
prices by p. and pr, and normalise pf = 1 for simplicity.
%3D
The demand for cloth and food in country j = H, F is given by x and r';:
1Y
and r
2 p.
2
where Y denotes aggregate income in country j.
(a) Draw or compute the PPFS of Home and Foreign.
(b) Derive the autarky equilibrium in Home, showing that L = L" and r" = q".
(c) Compute the autarky equilibrium in Foreign and compare equilibrium prices in
Home and in Foreign. Explain.
(d) With free trade in both goods c and f, which good will Home export, and will
capital owners, land owners and workers each be better off? Explain or compute.
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