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. (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? (d) In the light of your previous answers, please comment the following statement: “Regional inequalities across Europe are more persistent than in the United States on account of the lack of labor mobility in Europe”. (e) Now we return to the original situation: trade in goods and services. i) What happens to factor prices under free trade (in absolute and relative terms)?; ii) Compare your answer to the one you gave in the previous two items. Do you find any similarities? ; iii) After free trade, the relative price of steel will drop in which country?; iv) What will happen to the relative factor prices in Germany? (use the Lerner diagram and verify if your answer is consistent with the Stolper-Samuelson theorem); and v) In Germany, what will happen to the factor intensities (K/L) in each industry after free trade in goods?
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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.
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(a) What can you say about the relative endowments of the two countries? (Explain which trade theorem you are using to answer this question).
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(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?
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(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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(d) In the light of your previous answers, please comment the following statement: “Regional inequalities across Europe are more persistent than in the United States on account of the lack of labor mobility in Europe”.
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(e) Now we return to the original situation: trade in goods and services. i) What happens to factor prices under free trade (in absolute and relative terms)?; ii) Compare your answer to the one you gave in the previous two items. Do you find any similarities? ; iii) After free trade, the relative
price of steel will drop in which country?; iv) What will happen to the relative factor prices in Germany? (use the Lerner diagram and verify if your answer is consistent with the Stolper-Samuelson theorem); and v) In Germany, what will happen to the factor intensities (K/L) in each industry after free trade in goods?
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