International Economics: Trade

1. There are 100 units of labor in Japan and 50 units of labor in Taiwan. There are 50 units of land in Japan and 5 units of land in Taiwan. You are given the following information about production relationships.

Butane	aLB = 7	aTB = 2
Apple	aLA = 6	ATA = 3

Circle the right answer:

a. Determine each country’s factor abundance and each good’s factor intensity.

Japan Labor abumdant / Land abundant

Taiwan Labor abumdant / Land abundant

Butane Labor intensive / Land intensive

Apple Labor intensive / Land intensive

b. According to the Heckscher Ohlin model, which country will export butane?

Japan Taiwan

c. Suppose in Taiwan the supply of labor decreased from 50 units to 20 units (everything else remains the same), which country will export butane?

Japan Taiwan

2. Assume that the technology available to both countries is such that to produce one unit of wool requires 5 hours of labor and 4 units of land; to produce one unit of chocolate requires 5 hours of labor and 2 units of land. In Australia there are 300 hours of labor and 200 units of land. In Belgium there are 100 hours of labor and 50 units of land. Answer the following questions based on the HOS model.

a. Determine the factor intensities of the goods and the factor abundances of the countries. Circle the right answer.

Australia Labor abundant / Land abundant

Belgium Labor abundant / Land abundant

Wool Labor intensive / Land intensive

Chocolate Labor intensive / Land intensive

b. In Australia, under autarky if price of chocolates is $54 and price of wool is $58 then find wages and return to land.

w = ______ r = _______

c. In Belgium, under autarky if wages are $2 and return to land is $10 then find prices of chocolates and wool in Belgium under autarky.

Pw = _______ Pc = ________

d. Suppose that under trade the price of chocolates is $40 and the price of wool is $52. Find wages and returns to land in both countries under trade.

w = _______ r = ________

e. Who benefits and who loses from trade in each country? Circle the right answer.

Australia Labor: benefits / loses Land: benefits / loses

Belgium Labor: benefits / loses Land: benefits / loses

f. Explain how the results confirm the Stolper Samuelson theorem theorem.

3. Suppose that at current factor prices, each cask of wine requires 3 workers and 1 unit of land to produce and each bolt of cloth requires 2 workers and 4 units of land.

a. Suppose that a country’s resources are 100 workers and 120 units of land. Determine the allocation of resources and graph it using the box diagram.

TC = ______ LC = _______ TW = _______ LW = _______

b. Suppose that the supply of labor increases to 120. Determine the changing allocation of resources and graph it using the box diagram. Do the results confirm the logic of the Rybczynski effect?

TC = ______ LC = _______ TW = _______ LW = _______