Consider a world with two goods (steel and wine). There are two countries (Germany and France) which have identical technologies and preferences. Assume that the production of wine is relatively labor intensive, while the production of steel is relatively capital intensive. Also assume that after free trade in goods, Germany exports steel and France exports wine. 4. (a) What can you say about the relative endowments of the two countries? (Explain which trade theorem you are using to answer this question). (b) Before opening to trade in goods, both economies allow capital mobility. i) In which direction is capital flowing (explain why)? ii) What will happen to the production of wine and steel in both countries? (hint: using an Edgeworth box might help); and iii) What will be the effect of capital mobility on factor prices in the two countries? (c) Instead, assume that there is labor mobility instead of capital mobility. i) In which direction will labor flow? ii) What will happen with the production of steel and wine in both countries? (this time, instead of using the Edgeworth box, try to explain what happens stating the Rybzcynski theorem) iii) what will be the impact of labor mobility on factor prices in the two countries?
Consider a world with two goods (steel and wine). There are two countries (Germany and France) which have identical technologies and preferences. Assume that the production of wine is relatively labor intensive, while the production of steel is relatively capital intensive. Also assume that after free trade in goods, Germany exports steel and France exports wine. 4. (a) What can you say about the relative endowments of the two countries? (Explain which trade theorem you are using to answer this question). (b) Before opening to trade in goods, both economies allow capital mobility. i) In which direction is capital flowing (explain why)? ii) What will happen to the production of wine and steel in both countries? (hint: using an Edgeworth box might help); and iii) What will be the effect of capital mobility on factor prices in the two countries? (c) Instead, assume that there is labor mobility instead of capital mobility. i) In which direction will labor flow? ii) What will happen with the production of steel and wine in both countries? (this time, instead of using the Edgeworth box, try to explain what happens stating the Rybzcynski theorem) iii) what will be the impact of labor mobility on factor prices in the two countries?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider a world with two goods (steel and wine). There are two countries (Germany and
France) which have identical technologies and preferences. Assume that the production of wine
is relatively labor intensive, while the production of steel is relatively capital intensive. Also
assume that after free trade in goods, Germany exports steel and France exports wine.
4.
(a) What can you say about the relative endowments of the two countries? (Explain which
trade theorem you are using to answer this question).
(b) Before opening to trade in goods, both economies allow capital mobility. i) In which
direction is capital flowing (explain why)? ii) What will happen to the production of wine
and steel in both countries? (hint: using an Edgeworth box might help); and iii) What will
be the effect of capital mobility on factor prices in the two countries?
(c) Instead, assume that there is labor mobility instead of capital mobility. i) In which direction
will labor flow? ii) What will happen with the production of steel and wine in both
countries? (this time, instead of using the Edgeworth box, try to explain what happens
stating the Rybzcynski theorem) iii) what will be the impact of labor mobility on factor
prices in the two countries?
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