9. Answer ALL parts of this question. Holland produces cars and beer, using labour and capital, in a simplified Heckscher- Ohlin trade model where factors cannot be substituted for each other. Unit labour requirement for cars, in hours: azc = 4 Unit capital requirement for cars, in hours: agc = 3 Unit labour requirement for beer, in hours: ALB = 3 Unit capital requirement for beer, in hours: aks = 6 There are 1,000 man-hours of labour available and 1.200 machine-hours of capital available. Holland begins with no trade. (a) Explain which good is more capital intensive and show how you calculate this. (b) Draw the production possibility frontier, with cars on the y-axis and beer on the x- axis, and label each frontier line. Shade the area of possible production. Indicate at which point on the PPF both factors are being fully used. What are the implications of being away from this point? (c) To the right of the point you have indicated, what happens to the opportunity cost of producing more beer? Explain why this is and calculate the opportunity cost of increasing beer production on both sides of the point. Now Holland decides to open up to trade with Germany, which has identical production technologies. Germany has 2,000 man-hours of labour available and 2,000 machine-hours of capital available. (d) What pattern of trade would you expect under the Heckscher-Ohlin model, and why? (e) Explain what is likely to happen to the relative prices of the two goods in Holland and why this is. (f) Explain what the distributional effects of this opening to trade are likely to be. Which theorem states this as a general result? The Heckscher-Ohlin model makes predictions about worldwide factor prices, but in many cases these predictions are not backed up by the data. (g) Relate this predictive failure to the structure of the model. What model assumptions
9. Answer ALL parts of this question. Holland produces cars and beer, using labour and capital, in a simplified Heckscher- Ohlin trade model where factors cannot be substituted for each other. Unit labour requirement for cars, in hours: azc = 4 Unit capital requirement for cars, in hours: agc = 3 Unit labour requirement for beer, in hours: ALB = 3 Unit capital requirement for beer, in hours: aks = 6 There are 1,000 man-hours of labour available and 1.200 machine-hours of capital available. Holland begins with no trade. (a) Explain which good is more capital intensive and show how you calculate this. (b) Draw the production possibility frontier, with cars on the y-axis and beer on the x- axis, and label each frontier line. Shade the area of possible production. Indicate at which point on the PPF both factors are being fully used. What are the implications of being away from this point? (c) To the right of the point you have indicated, what happens to the opportunity cost of producing more beer? Explain why this is and calculate the opportunity cost of increasing beer production on both sides of the point. Now Holland decides to open up to trade with Germany, which has identical production technologies. Germany has 2,000 man-hours of labour available and 2,000 machine-hours of capital available. (d) What pattern of trade would you expect under the Heckscher-Ohlin model, and why? (e) Explain what is likely to happen to the relative prices of the two goods in Holland and why this is. (f) Explain what the distributional effects of this opening to trade are likely to be. Which theorem states this as a general result? The Heckscher-Ohlin model makes predictions about worldwide factor prices, but in many cases these predictions are not backed up by the data. (g) Relate this predictive failure to the structure of the model. What model assumptions
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Question 9 d e and f
Can you please help solve question 9 d e and f thank you
Transcribed Image Text:9.
Answer ALL parts of this question.
Holland produces cars and beer, using labour and capital, in a simplified Heckscher-
Ohlin trade model where factors cannot be substituted for each other.
Unit labour requirement for cars, in hours: ac = 4
Unit capital requirement for cars, in hours: agc = 3
Unit labour requirement for beer, in hours: aLB = 3
Unit capital requirement for beer, in hours: ags = 6
There are 1,000 man-hours of labour available and 1,200 machine-hours of capital
available. Holland begins with no trade.
(a)
Explain which good is more capital intensive and show how you calculate this.
(b)
Draw the production possibility frontier, with cars on the y-axis and beer on the x-
axis, and label each frontier line. Shade the area of possible production. Indicate at
which point on the PPF both factors are being fully used. What are the implications
of being away from this point?
(c) To the right of the point you have indicated, what happens to the opportunity cost of
producing more beer? Explain why this is and calculate the opportunity cost of
increasing beer production on both sides of the point.
Now Holland decides to open up to trade with Germany, which has identical
production technologies. Germany has 2,000 man-hours of labour available and 2,000
machine-hours of capital available.
(d)
What pattern of trade would you expect under the Heckscher-Ohlin model, and
why?
(e)
Explain what is likely to happen to the relative prices of the two goods in Holland
and why this is.
(f)
Explain what the distributional effects of this opening to trade are likely to be.
Which theorem states this as a general result?
The Heckscher-Ohlin model makes predictions about worldwide factor prices, but in
many cases these predictions are not backed up by the data.
(g) Relate this predictive failure to the structure of the model. What model assumptions
are most questionable? Give real-world examples of where the assumptions are not
true to illustrate your answer.
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