Exset3slides

Problem Set 3: Notes*
*Slides as used in class. Additional notes and discussion not included.
Comparison of models
- countries differ in technologies- one factor (labor): constant marginal returns- trade: countries specialize completely- potential to gain from trade: different relative marginal productivity (constant) - countries differ in endowments (same technology)- three factors (two specific): decreasing marginal returns- trade: part of labor (production) shifts to other sector, but specialization stays incomplete- potential to gain from trade: different relative marginal productivity of labor (=> dependent on endowments!) Problem 1
relative prices in autarky are determined by: - demand: 'highest possible' indifference curve - supply: PPF => ratio of marginal labor productivities implication of of K* > K for relative prices in autarky: - higher capital stock implies higher labor productivity in Foreign - Foreign has a higher PPF => more M possible for a given amount of F - Consumers prefer a 'mixed' consumption bundle - M has a 'cheaper' relative price in Foreign than in Home => slope of price line steeper in Foreign Given the difference in relative prices, the countries will trade at anintermediate price ratio Foreign has CA in M, and therefore exports M and imports F => answer (a) In general:A country is likely to export the good of which the specific factor isplentiful! Problem 2
increases the value marginal product of labor employed in sector F by 10% wage increases: - workers move from sector C to sector F. higher than before because of increase in price higher than before because of increase in(lower increases the value marginal product of labor employed in sector F by 10%(more land per worker => higher labor productivity) wage increases: - workers move from sector C to sector F. higher than before because of increase in land higher than before because of increase in(lower 'Do these changes have equivalent effects on the wage rate?' - they both increase the wage rate- which change leads to a stronger increase is dependent on the 'Which kind of change would workers prefer?' - workers prefer the kind with the highest increase in real wage - both changes increase the nominal wage - the first kind of change also increases the price of food=> in case both kinds of changes increase the nominal wage by the same amount, the second kind of change is preferred - in any case, the labor employed on sector C decreases, and therefore also the marginal product of capital decreases=> capitalists are wores off anyway- which kind of change has a stronger effect on - capitalists prefer the kind of change after which they have the Problem 3
Task a – the country cannot trade
- increase in capital increases marginal product of labor in cloth production- labor moves from food sector to clothing sector => marginal product of land decreases (because there is 'less labor per land') - the relative supply of food decreases=> the relative price of food increases .accordingly, the net effect on the land rental rate is ambiguous inautarky: Task b – the country trades
as above:- increase in capital increases marginal product of labor in cloth production- labor moves from food sector to clothing sector => marginal product of land decreases (because there is 'less labor per land') => the land rental rate decreases under free trade: Problem 4
take Australia as an example of a SOE.
.that has a wool sector and a manufacturing sector.
'Why do land- and capitalowners favor the same immigration policy?' - at constant prices, immigration leads to a decrease in the (value) marginal products in both sectors- wages drop- factorowner rents increase (higher marginal productivities) => land- and capitalowners both favor immigration Effects of an import tariff on manufactures:
- a tariff increases the domestic prices of manufactures
- this raises the VMP of labor in the manufacturing sector
- labor is attracted to the manufacturing sector, away from the wool sector
- the loss of labor reduces the MP of land (less 'workers per land' in the
wool sector)
Problem 5
- factor A is specific in the production of Y- countries are both small and take prices from a large world market- constant marginal costs of production (constant returns to scale) CA & AA matter for determination of the production and trade pattern! CA: compare unit labor requirements for both goods ratio of u.l.r. determines the minimum relative price of Y at which firms can offer a positive wage for the footloose factor A=> CA determines which country can attract the footloose factor at a low price of Y! (here: Foreign) AA: compare unit footloose factor requirements u.f.f.r. determine by how much the wage offer to the footloose factor can be increased as the relative price of good Y increases=> AA determines which country can offer a higher wage for A as theprice of Y increases (here: home) - use the wage equations of the two sectors Y and X (zero profit!) - in equilibrium, wages are equal in two sectors (otherwise workers move) => home cannot offer RA > 6.25 (would mean making negative profits) - Doing the analogous for foreign yields: foreign cannot offer RA* > 5.8 => home offers a wage RA > 5.8 and attracts the footloose factor A!(=> foreign can only produce X) - if home offered 6.25 > RA > 5.8, positive profits would attract new firms to the market- only Y would be produced at home, no X- perfect competition would drive prices up until profits are zero - so in equilibrium, the wage RA=6.25 Determine what maximum wage the firms can offer, analogously to (b): foreign this time can offer a higher wage than home!=> in equilibrium, foreign offers RA*=4.6 and produces Y (and X) home can only produce X now the wage for the footloose factor is restricted to be RA=RA*=2 => countries don't compete for the footloose factor any more=> firms in both countries can offer that wage, and make positive profits, producing Y and selling it at pY/pX=7=> both countries will specialize in the production of Y (produce no X)

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