Question 1) Assume that labor is the only productive input and there are 20,000 hours of labor available in country A. Five hours of labor are needed to produce 1 skirt, as 4 hours are required to produce 1 t-shirt.
a) Illustrate country A’s PPF (with skirts on the x-axis).
b) C that the free trade relative price of skirts is 2, Pskirts/Pshirts=2. Which good will country A export? How many skirts and t-shirts will country A produce once trade is allowed? Demonstrate the production point as well as the consumption possibilities frontier on diagram you drew in part a).
Question 2) Data on the factor endowments of two countries, A and B is given below:
Countries
A B
Labor Force (millions of workers) 45 20
Capital Stock (thousands of machines) 15 10
a) Determine the country which is relatively capital abundant? Which country is relatively labor abundant? Describe
b) Assume that good S is capital intensive relative to good T. Which country will have comparative advantage in production of S? describe.
Question 3) Mention the factor price equalization theorem. Some have argued that factor price equalization theorem implies that U.S. wages should fall to level of those found in the least developed countries of the world. Comment on the validity of this statement.
Question 4) What is Leontief Paradox? Name three of the attempted reconciliations of Leontief’s findings. Explain one of them.
Question 5) Describe different reasons why we might expect countries to engage in intraindustry trade.
Question 6) Assume that domestic demand and supply for shoes in a small open economy are given by
P = 100 - 2Q (demand) where P denotes price and Q denotes quantity.
P = 4 + Q (supply)
a) What are the autarky price of shoes and quantity produced? Show them on demand and supply diagram for shoes.
b) Write down the levels of domestic production, consumption, and imports if the world price is 10? Show them on the demand and supply diagram for shoes.
c) Use the diagram you drew in part b) to prove that country is better off with free trade.
d) What are the levels of domestic production, consumption, imports, and government revenue if this country were to impose a specific tariff of $2?
e) In a separate diagram, demonstrate the effect of import tariff in part d) on the society’s net welfare i.e. demonstrate the net welfare change of a move from free trade to trade with tariff.
f) Determine the deadweight cost of tariff in part d) (if there is any)?