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Chapter3

1．Homehas1200unitsoflaboravailable.Itcanproducetwogoods,applesandbananas.Theunitlaborrequirementinappleproductionis3,whileinbananaproductionitis2.

a．Graphouttheproductionpossibilitiesfrontier:

b．Whatistheopportunitycostofapplesintermsofbananas?

c．Intheabsenceoftrade,whatwouldthepriceofapplesintermsofbananasbe?

Intheabsenceoftrade,sincelaboristheonlyfactorofproductionandsupplydecisionsaredeterminedbytheattemptsofindividualstomaximizetheirearningsinacompetitiveeconomy,onlywhenwillbothgoodsbeproduced.So

2．Homeisasdescribedinproblem1.Thereisnowalsoanothercountry,Foreign,withalaborforceof800.Foreign’sunitlaborrequirementinappleproductionis5,whileinbananaproductionitis1.

a．GraphForeign’sproductionpossibilitiesfrontier:

b．Constructtheworldrelativesupplycurve.

3．Nowsupposeworldrelativedemandtakesthefollowingform:Demandforapples/demandforbananas=priceofbananas/priceofapples.

a．Graphtherelativedemandcurvealongwiththerelativesupplycurve:

∵Whenthemarketachievesitsequilibrium,wehave

∴RDisahyperbola

b．Whatistheequilibriumrelativepriceofapples?

TheequilibriumrelativepriceofapplesisdeterminedbytheintersectionoftheRDandRScurves.

RD:

RS:

∴

∴

c．Describethepatternoftrade.

∵

∴Inthistwo-countryworld,Homewillspecializeintheappleproduction,exportapplesandimportbananas.Foreignwillspecializeinthebananaproduction,exportbananasandimportapples.

d．ShowthatbothHomeandForeigngainfromtrade.

InternationaltradeallowsHomeandForeigntoconsumeanywherewithinthecoloredlines,whichlieoutsidethecountries’productionpossibilityfrontiers.Andtheindirectmethod,specializinginproducingonlyoneproductionthentradewithothercountry,isamoreefficientmethodthandirectproduction.Intheabsenceoftrade,Homecouldgainthreebananasbyforegoingtwoapples,andForeigncouldgainbyoneforegoingfivebananas.Tradeallowseachcountrytotradetwobananasforoneapple.HomecouldthengainfourbananasbyforegoingtwoappleswhileForeigncouldgainoneapplebyforegoingonlytwobananas.SobothHomeandForeigngainfromtrade.

4．Supposethatinsteadof1200workers,Homehad2400.Findtheequilibriumrelativeprice.WhatcanyousayabouttheefficiencyofworldproductionandthedivisionofthegainsfromtradebetweenHomeandForeigninthiscase?

RD:

RS:

∴

∴

Inthiscase,Foreignwillspecializeinthebananaproduction,exportbananasandimportapples.ButHomewillproducebananasandapplesatthesametime.AndtheopportunitycostofbananasintermsofapplesforHomeremainsthesame.SoHomeneithergainsnorlosesbutForeigngainsfromtrade.

5．SupposethatHomehas2400workers,buttheyareonlyhalfasproductioninbothindustriesaswehavebeenassuming,Constructtheworldrelativesupplycurveanddeterminetheequilibriumrelativeprice.Howdothegainsfromtradecomparewiththoseinthecasedescribedinproblem4?

Inthiscase,thelaborisdoubledwhiletheproductivityoflaborishalved,sothe＂effectivelabor＂remainsthesame.Sotheanswerissimilartothatin3.AndbothHomeandForeigncangainfromtrade.ButForeigngainslessercomparewiththatinthecase4.

6．〞Koreanworkersearnonly$2.50anhour;ifweallowKoreatoexportasmuchasitlikestotheUnitedStates,ourworkerswillbeforceddowntothesamelevel.Youcan’timporta$5shirtwithoutimportingthe$2.50wagethatgoeswithit.〞Discuss.

Infact,relativewagerateisdeterminedbycomparativeproductivityandtherelativedemandforgoods.Korea’slowwagereflectsthefactthatKoreaislessproductivethantheUnitedStatesinmostindustries.Actually,tradewithalessproductive,lowwagecountrycanraisethewelfareandstandardoflivingofcountrieswithhighproductivity,suchasUnitedStates.Sothispauperlaborargumentiswrong.

7．JapaneselaborproductivityisroughlythesameasthatoftheUnitedStatesinthemanufacturingsector(higherinsomeindustries,lowerinothers),whiletheUnitedStates,isstillconsiderablymoreproductiveintheservicesector.Butmostservicesarenon-traded.SomeanalystshavearguedthatthisposesaproblemfortheUnitedStates,becauseourcomparativeadvantageliesinthingswecannotsellonworldmarkets.Whatiswrongwiththisargument?

Thecompetitiveadvantageofanyindustrydependsonboththerelativeproductivitiesoftheindustriesandtherelativewagesacrossindustries.Sotherearefouraspectsshouldbetakenintoaccountbeforewereachconclusion:boththeindustriesandservicesectorsofJapanandU.S.,notjustthetwoservicesectors.Sothisstatementdoesnotbadeonthereasonablelogic.

8．AnyonewhohasvisitedJapanknowsitisanincrediblyexpensiveplace;althoughJapaneseworkersearnaboutthesameastheirU.S.counterparts,thepurchasingpoweroftheirincomesisaboutone-thirdless.Extendyourdiscussingfromquestion7toexplainthisobservation.(Hint:Thinkaboutwagesandtheimpliedpricesofnon-tradegoods.)

TherelativehigherpurchasingpowerofU.S.issustainedandmaintainedbyitsconsiderablyhigherproductivityinservices.Becausemostofthoseservicesarenon-traded,Japanesecouldnotbenefitfromthoselowerservicecosts.AndU.S.doesnothavetofacealowerinternationalpriceofservices.SothepurchasingpowerofJapaneseisjustone-thirdoftheirU.S.counterparts.

9．Howdoesthefactthatmanygoodsarenon-tradedaffecttheextentofpossiblegainsfromtrade?

Actuallythegainsfromtradedependedontheproportionofnon-tradedgoods.Thegainswillincreaseastheproportionofnon-tradedgoodsdecrease.

10．Wehavefocusedonthecaseoftradeinvolvingonlytwocountries.Supposethattherearemanycountriescapableofproducingtwogoods,andthateachcountryhasonlyonefactorofproduction,labor.Whatcouldwesayaboutthepatternofproductionandinthiscase?(Hint:Tryconstructingtheworldrelativesupplycurve.)

Anycountriestotheleftoftheintersectionoftherelativedemandandrelativesupplycurvesexportthegoodinwhichtheyhaveacomparativeadvantagerelativetoanycountrytotherightoftheintersection.Iftheintersectionoccursinahorizontalportionthenthecountrywiththatpriceratioproducesbothgoods.

Chapter4

IntheUnitedStateswherelandischeap,theratiooflandtolaborusedincattlerisingishigherthanthatoflandusedinwheatgrowing.Butinmorecrowdedcountries,wherelandisexpensiveandlaborischeap,itiscommontoraisecowsbyusinglesslandandmorelaborthanAmericansusetogrowwheat.Canwestillsaythatraisingcattleislandintensivecomparedwithfarmingwheat?Whyorwhynot?

Thedefinitionofcattlegrowingaslandintensivedependsontheratiooflandtolaborusedinproduction,notontheratiooflandorlabortooutput.TheratiooflandtolaborincattleexceedstheratioinwheatintheUnitedStates,implyingcattleislandintensiveintheUnitedStates.Cattleislandintensiveinothercountriestooiftheratiooflandtolaborincattleproductionexceedstheratioinwheatproductioninthatcountry.ThecomparisonbetweenanothercountryandtheUnitedStatesislessrelevantforansweringthequestion.

Supposethatatcurrentfactorpricesclothisproducedusing20hoursoflaborforeachacreofland,andfoodisproducedusingonly5hoursoflaborperacreofland.

Supposethattheeconomy’stotalresourcesare600hoursoflaborand60acresofland.Usingadiagramdeterminetheallocationofresources.

WecansolvethisalgebraicallysinceL=LC+LF=600andT=TC+TF=60.

ThesolutionisLC=400,TC=20,LF=200andTF=40.

Labor

Land

Cloth

Food

Nowsupposethatthelaborsupplyincreasefirstto800,then1000,then1200hours.UsingadiagramlikeFigure4-6,traceoutthechangingallocationofresources.

Labor

Land

Cloth

Food

0l800

0l1000

0l1200

Whatwouldhappenifthelaborsupplyweretoincreaseevenfurther?

Atconstantfactorprices,somelaborwouldbeunused,sofactorpriceswouldhavetochange,ortherewouldbeunemployment.

“Theworld’spoorestcountriescannotfindanythingtoexport.Thereisnoresourcethatisabundant—certainlynotcapitalorland,andinsmallpoornationsnotevenlaborisabundant.〞Discuss.

Thegainsfromtradedependoncomparativeratherthanabsoluteadvantage.Astopoorcountries,whatmattersisnottheabsoluteabundanceoffactors,buttheirrelativeabundance.Poorcountrieshaveanabundanceoflaborrelativetocapitalwhencomparedtomoredevelopedcountries.

TheU.S.labormovement—whichmostlyrepresentsblue-collarworkersratherthanprofessionalsandhighlyeducatedworkers—hastraditionallyfavoredlimitsonimportsformless-affluentcountries.Isthisashortsightedpolicyofarationaloneinviewoftheinterestsofunionmembers?Howdoestheanswerdependonthemodeloftrade?

IntheRicardo’smodel,laborgainsfromtradethroughanincreaseinitspurchasingpower.Thisresultdoesnotsupportlaboruniondemandsforlimitsonimportsfromlessaffluentcountries.

IntheImmobileFactorsmodellabormaygainorlosefromtrade.Purchasingpowerintermsofonegoodwillrise,butintermsoftheothergooditwilldecline.

TheHeckscher-Ohlinmodeldirectlydiscussesdistributionbyconsideringtheeffectsoftradeontheownersoffactorsofproduction.Inthecontextofthismodel,unskilledU.S.laborlosesfromtradesincethisgrouprepresentstherelativelyscarcefactorsinthiscountry.TheresultsfromtheHeckscher-Ohlinmodelsupportlaboruniondemandsforimportlimits.

ThereissubstantialinequalityofwagelevelsbetweenregionswithintheUnitedStates.Forexample,wagesofmanufacturingworkersinequivalentjobsareabout20percentlowerintheSoutheastthantheyareintheFarWest.Whichoftheexplanationsoffailureoffactorpriceequalizationmightaccountforthis?HowisthiscasedifferentfromthedivergenceofwagesbetweentheUnitedStatesandMexico(whichisgeographicallyclosertoboththeU.S.SoutheastandtheFarWestthantheSoutheastandFarWestaretoeachother)?

Whenweemployfactorpriceequalization,weshouldpayattentiontoitsconditions:bothcountries/regionsproducebothgoods;bothcountrieshavethesametechnologyofproduction,andtheabsenceofbarrierstotrade.InequalityofwagelevelsbetweenregionswithintheUnitedStatesmaycausedbysomeorallofthesereasons.

Actually,thebarrierstotradealwaysexistintherealworldduetotransportationcosts.AndthetradebetweenU.S.andMexico,bycontrast,issubjecttolegallimits;togetherwithculturaldifferencesthatinhibittheflowoftechnology,thismayexplainwhythedifferenceinwageratesissomuchlarger.

ExplainwhytheLeontiefparadoxandthemorerecentBowen,Leamer,andSveikauskasresultsreportedinthetextcontradictthefactor-proportionstheory.

Thefactorproportionstheorystatesthatcountriesexportthosegoodswhoseproductionisintensiveinfactorswithwhichtheyareabundantlyendowed.OnewouldexpecttheUnitedStates,whichhasahighcapital/laborratiorelativetotherestoftheworld,toexportcapital-intensivegoodsiftheHeckscher-Ohlintheoryholds.LeontieffoundthattheUnitedStatesexportedlabor-intensivegoods.Bowen,LeamerandSveikauskasfoundthatthecorrelationbetweenfactorendowmentandtradepatternsisweakfortheworldasawhole.Thedatadonotsupportthepredictionsofthetheorythatcountries'exportsandimportsreflecttherelativeendowmentsoffactors.

InthediscussionofempiricalresultsontheHeckscher-Ohlinmodel,wenotedthatrecentworksuggeststhattheefficiencyoffactorsofproductionseemstodifferinternationally.Explainhowthiswouldaffecttheconceptoffactorpriceequalization.

Iftheefficiencyofthefactorsofproductiondiffersinternationally,thelessonsoftheHeckscher-Ohlintheorywouldbeappliedto“effectivefactors〞whichadjustforthedifferencesintechnologyorworkerskillsorlandquality(forexample).Theadjustedmodelhasbeenfoundtobemoresuccessfulthantheunadjustedmodelatexplainingthepatternoftradebetweencountries.Factor-priceequalizationconceptswouldapplytotheeffectivefactors.Aworkerwithmoreskillsorinacountrywithbettertechnologycouldbeconsideredtobeequaltotwoworkersinanothercountry.Thus,thesinglepersonwouldbetwoeffectiveunitsoflabor.Thus,theonehigh-skilledworkercouldearntwicewhatlowerskilledworkersdoandthepriceofoneeffectiveunitoflaborwouldstillbeequalized.

chapter8

1. Theimportdemandequation,MD,isfoundbysubtractingthehomesupplyequationfromthehomedemandequation.ThisresultsinMD=80-40xP.Withouttrade,domesticpricesandquantitiesadjustsuchthatimportdemandiszero.Thus,thepriceintheabsenceoftradeis2.

2. a. Foreign'sexportsupplycurve,XS,isXS=-40+40xP.Intheabsenceoftrade,thepriceis1.

b. Whentradeoccursexportsupplyisequaltoimportdemand,XS=MD.Thus,usingtheequationsfromproblems1and2a,P=1.50,andthevolumeoftradeis20.

3. a. ThenewMDcurveis80-40x(P+t)wheretisthespecifictariffrate,equalto0.5.(Note:insolvingtheseproblemsyoushouldbecarefulaboutwhetheraspecifictarifforadvaloremtariffisimposed.Withanadvaloremtariff,theMDequationwouldbeexpressedasMD=80-40x(1+t)P).Theequationfortheexportsupplycurvebytheforeigncountryisunchanged.Solving,wefindthattheworldpriceis$1.25,andthustheinternalpriceathomeis$1.75.Thevolumeoftradehasbeenreducedto10,andthetotaldemandforwheatathomehasfallento65(fromthefreetradelevelof70).ThetotaldemandforwheatinForeignhasgoneupfrom50to55.

b. andc.ThewelfareofthehomecountryisbeststudiedusingthecombinednumericalandgraphicalsolutionspresentedbelowinFigure8-1.

wheretheareasinthefigureare:

a:55(1.75-1.50)-.5(55-50)(1.75-1.50)=13.125

b:.5(55-50)(1.75-1.50)=0.625

c:(65-55)(1.75-1.50)=2.50

d:.5(70-65)(1.75-1.50)=0.625

e:(65-55)(1.50-1.25)=2.50

Consumersurpluschange:-(a+b+c+d)=-16.875.Producersurpluschange:a=13.125.Governmentrevenuechange:c+e=5.Efficiencylossesb+dareexceededbytermsoftradegaine.[Note:inthecalculationsforthea,b,anddareasafigureof.5showsup.Thisisbecausewearemeasuringtheareaofatriangle,whichisone-halfoftheareaoftherectangledefinedbytheproductofthehorizontalandverticalsides.]

4. Usingthesamesolutionmethodologyasinproblem3,whenthehomecountryisverysmallrelativetotheforeigncountry,itseffectsonthetermsoftradeareexpectedtobemuchless.Thesmallcountryismuchmorelikelytobehurtbyitsimpositionofatariff.Indeed,thisintuitionisshowninthisproblem.Thefreetradeequilibriumisnowattheprice$1.09andthetradevolumeisnow$36.40.

Withtheimpositionofatariffof0.5byHome,thenewworldpriceis$1.045,theinternalhomepriceis$1.545,homedemandis69.10units,homesupplyis50.90andthevolumeoftradeis18.20.WhenHomeisrelativelysmall,theeffectofatariffonworldpriceissmallerthanwhenHomeisrelativelylarge.WhenForeignandHomewerecloserinsize,atariffof.5byhomeloweredworldpriceby25percent,whereasinthiscasethesametarifflowersworldpricebyabout5percent.TheinternalHomepriceisnowclosertothefreetradepriceplustthanwhenHomewasrelativelylarge.Inthiscase,thegovernmentrevenuesfromthetariffequal9.10,theconsumersurpluslossis33.51,andtheproducersurplusgainis21.089.Thedistortionarylossesassociatedwiththetariff(areasb+d)sumto4.14andthetermsoftradegain(e)is0.819.Clearly,inthissmallcountryexamplethedistortionarylossesfromthetariffswampthetermsoftradegains.Thegenerallessonisthesmallertheeconomy,thelargerthelossesfromatariffsincethetermsoftradegainsaresmaller.

5. Theeffectiverateofprotectiontakesintoconsiderationthecostsofimportedintermediategoods.Inthisexample,halfofthecostofanaircraft