Problem set 2 The Ricardian Model

Transcription

1 Problem set 2 The Ricrdin Model Eercise 1 Consider world with two countries, U nd V, nd two goods, nd F. It is known tht the mount of work vilble in U is 150 nd in V is 84. The unit lbor requirements for the production of one the two goods in countr c for sector i re s follows: U c i V F 2 3 ) Drw the PPF s of both countries nd determine the pttern of trde. b) Suppose tht there is technologicl improvement in V, so tht now it onl requires unit of work to produce unit of F. Is there chnge in the speciliztion pttern? Eplin with the help of grph. c) Determine the effects of trde openness: i. On the reltive price of goods; ii. iii. On the ptterns of production nd consumption; On the rel wges in ech countr. d) Do the rel wges in both countries converge with interntionl trde? Wh? Eercise 2 Consider smll econom (Home), where ech worker cn produce 1 unit of good or, lterntivel, 4 units of good. In the lrge countr (Foreign), ech worker produces 2 units of good or, lterntivel, 4 units of good. It is known tht in the Home countr there re 100 workers. ) Comment the following sttement: Since workers in both countries hve the sme productivit regrding good, there should be no trde with this good. b) Is there n dvntge in free trde between both countries? If es, describe the pttern of trde nd the gins from trde. c) Comment the following sttement: The volume of Home s eports is the double of Foreign s eports. [Hint: Notice the difference between volume nd vlue.] d) Determine how rel wges evolve in Home when this countr engges in free trde with Foreign. [Hint: Mrginl productivit in sector onl eists if the countr is producing tht good.] freits@u.pt Miguel Lebre de Freits 5

2 e) Determine the rtio of wges between both countries fter free trde. Comment on the result. Eercise 3 Consider two Ricrdin economies, nd, with similr sizes, with the following technicl coefficients for the production of nd : c i ) Find conditions for the coefficients, such tht: i. Countr hs bsolute dvntges in both goods, but there re no gins from trde. ii. Countr hs bsolute dvntges in both goods, nd both hve the incentive to trde, with countr specilizing in the production of good. b) Under which conditions will free trde led to the equliztion of rel wges cross countries? Eercise 4 Consider Eercise 1 gin (fter the technologicl improvement), but ssume further tht welfre functions in both countries re identicl nd given b U F. Determine the following: ) The equilibri under utrk. b) The demnds for goods nd F in both countries. c) The equilibrium price under free trde, s well s the corresponding trde flows. d) The chnges in rel wges in both countries, ssocited to the move from utrk to free trde. e) The reltive wge rte between the two countries. f) Emine the effects of n increse in the number of workers in V from 84 to 100. If fterwrds the number of workers in V continues to increse stedil, wht would hppen? freits@u.pt Miguel Lebre de Freits 6

3 Eercise 5 Home hs 1200 units of lbor vilble. It cn produce two goods, pples nd bnns. The unit lbor requirement in pple production is 3, while in bnn production it is 2. ) Grph Home s production possibilit frontier (PPF). b) Wht is the opportunit cost of pples in terms of bnns? c) In the bsence of trde, wht would the price of pples in terms of bnns be? Wh? There is now lso nother countr, Foreign, with lbor force of 800. Foreign s unit lbor requirement in pple production is 5, while in bnn production it is 1. d) Grph Foreign s PPF. e) Construct the world reltive suppl curve. Now suppose world reltive demnd tkes the following form: Demnd for pples/demnd for bnns price of bnns/price of pples. f) Grph the reltive demnd curve long with the reltive suppl curve. g) Wht is the equilibrium reltive price of pples? Describe the pttern of trde. h) Show tht both Home nd Foreign gin from trde. i) Compute the rel wges in Home before nd with free trde. Suppose tht insted of 1200 workers, Home hs Find the equilibrium reltive price. j) Wht cn ou s bout the efficienc of world production nd the division of the gins from trde between Home nd Foreign in this cse? Suppose tht Home hs 2400 workers, but the re onl hlf s productive in both industries s we hve been ssuming. k) Construct the world reltive suppl curve nd determine the equilibrium reltive price. How do the gins from trde compre with those in the cse h) nd j)? dpted from Krugmn et l Interntionl Economics: Theor & Polic (chpter 3, eercises 1 5). Eercise 6 Koren workers receive $2.50 per hour. If we open our borders to trde with tht countr, our workers would hve to suffer wge decrese to tht level or we would be crushed b competition. Comment this sttement in light of the Ricrdin model. freits@u.pt Miguel Lebre de Freits 7

4 Eercise 7 In Ricrdin world there re two economies, Estlnd nd Westlnd, with lbor endowments equl to 200 nd 100, respectivel. oth use their unique production fctor to produce two goods, nd. In Estlnd, the unit lbor requirements re equl to 4 in both industries, wheres in Westlnd the re equl to 4 nd 1 for sectors nd, respectivel. With equl preferences in the world, the reltive demnd is equl to D ( ) P P /. ) Eplin if there re bsolute nd/or comprtive dvntges. b) Determine the reltive prices in utrk nd the equilibrium price under free trde. Represent the equilibrium with the reltive demnd nd reltive suppl. c) Compute the rel wges before nd fter trde in Estlnd. [If ou didn t solve b), ssume tht with trde the equilibrium price is P 3]. P d) Will there be convergence of wges with free trde in this cse? Is this generl result? freits@u.pt Miguel Lebre de Freits 8

5 Solutions PS 2 Eercise 1 Solved in clss. Eercise 2 ) Wrong. b) Home eports, imports. c) True. d) efore trde: ( w p ) 4 ( w p ) 4; With trde: ( w p ) 2 ( w p ) 4 e) w H w F 1 Eercise 3 ) <, <. In ddition, in (i) ; in (ii) < b) If hs comprtive dvntge in : <, <, ( P P ) *. Eercise 4 ) In U: (, F) (150, 37.5). In V: (, F) (140, 42). c) P V P F d) ( w ) 1 (const.); ( w ) V 10/3 25/7; ( w ) 2 (const.); ( ) U p F p e) V will become lrge countr. p U w 0.5 p F Eercise 5 b) 1.5 bnns. c) Reltive price of pples 1.5 g) Reltive price of pples 2; Home eports pples, imports bnns. i) (pples re ) efore: ( ) 1 3 ( ) 2 3 w, ( ) 0. 5 p w ; w/ trde: ( ) 1 3 p w, w. j) Reltive price of pples 1.5. Onl Foreign will eperience p gins from trde. k) Gins re identicl to question h). p Eercise 6 Wrong. freits@u.pt Miguel Lebre de Freits 9

6 Eercise 7 ) Westlnd hs bsolute nd comprtive dvntge in. * b) ( P P ) < ( P P ) < ( P P ) 1< 2 < 4 ut E ut W c) w P 1 4 (before nd fter); w 1 1 increses from to. P 4 2 * d) No convergence. Here, with ( ) 4 P there would be convergence. P freits@u.pt Miguel Lebre de Freits 10