ECON 470 International Trade-underlying reason for this apparent


Part I. Essay/Analytical Questions: Choose 2 out of 3, 10 points each.

1. Answer BOTH of the following two independent parts:

A) Ekonland is in autarky, Capital is mobile between sectors, but there are two kinds of labor (skilled and unskilled) specific to one sector. During a national referendum regarding free trade with its neighbor, Utopia, the Union of Skilled Labor strongly objected. What does this tell you about the comparative advantage of Ekonland?

B) Define the “Leontief Paradox”. Why is it a “paradox? What is the possible underlying reason for this apparent paradox?

2. Use the 4-panel diagram of the derivation of the PPF (supplemental material in the lecture and not in the book) to show, SEPERATELY, the effect of an increase in labor (immigration) and an increase in capital (K) on the PPF for a:
a) Specific-Factor Model, where Land is specific to Food and capital is specific to Manufacturing.
b) H-O model, where Shoe is L-intensive and Computer is K-intensive

3. The graph at the top of the next page shows the Home’s before- (autarky) and after-trade equilibrium. Shoe is1 labor intensive and Computer is capital intensive

Part II. Analytical Questions: Answer BOTH questions, 40 points each.

1. In a Samuelson-Jones world, two goods are produced, Cloth (denoted as C) and Food (F). Define the relative price as p = PC/PF. It is known that RS* lies BELOW home RS. The two countries engaged in free trade and was at a stable equilibrium (we shall call this the original equilibrium). A terrible epidemic caused a 20% loss of life in the Foreign nation. Answer the following clearly:

a) Who has comparative advantage in what?

b) In the RD/RS diagram, illustrate the impact of this epidemic. Will the change in TOT be in Home’s favor? Explain the result intuitively.

c) Discuss how this affects the allocation of labor for Home. Make sure you clearly state your assumptions on what changed (e.g. PF or PC, and how MPL changed, if any).

d) Discuss how the income distribution of Home is changed, use graphs and verbal explanation.

2. In the framework of the standard trade model (the Heckscher–Ohlin Model), two goods are produced: Food (Labor intensive) and Manufacturing (Capital intensive). Ekonland (Home) is Capital abundant.

a) In the three graphs discussed in class (the PPF, the RS/RD, and the relative factor price-factor-intensity), show the autarky and free trade equilibrium. “Demonstrate” the gains from trade.

b) Due to a war, Ekonland lost 30% of its K, while L was unaffected. Answer the following:

1) Illustrate how this affects the PPF of Ekonland. If the relative price (PM/PF) stays unchanged, discuss how this event will affect the product mix.

2) Is it reasonable to assume the relative price stays unchanged? Discuss in the RS/RD diagram.

3) Discuss the income distribution effects of this event in terms of relative factor price

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