International Trade/ Specific Factor Model

timer Asked: Oct 12th, 2014

Question description

-  Question:

Consider a small economy producing two goods, clothing and food. The clothing industry uses capital (K) and labor (LC) as inputs, while the food industry uses land (La) and labor (LF ) as factors of production. The production technologies for the two industries are given by:

  QC = K1/4 Lc3/4   ;  QF = La1/2 LF1/2

Also, the country is endowed with 216 units of capital, 1822 units of

labor, and 9 units of land. Finally, the utility function of the representative

consumer is given by U(CC;CF ) = Cc1/2 CF1/2

1. Calculate the autarky production (= consumption) for the two industries.

2. Derive the autarky price ratio ( [img width="13" height="22" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image001.png">A, and the real value of production(i.e. real GDP) in autarky.

3. Determine the autarky utility level.

4. Determine LC and LF in autarky.

5. Calculate the real wage rate ([img width="21" height="21" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image002.png">[img width="21" height="21" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image003.png">real return on land ([img width="21" height="23" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image004.png">

6. Calculate real total factor income in autarky. Is it equal to the real value of production that you calculated previously?

7. Now, assume that the country is allowed to trade with the rest of the

world at the free trade price ratio, ([img width="18" height="22" id="_x0000_i1025" src="file://localhost/Users/lolwah/Library/Caches/TemporaryItems/msoclip/0clip_image005.png">equal to 0:1244.

8. Determine the pattern of trade for the home country. Briefly explain the possible causes for the HC’s comparative advantage.

9. Determine LC and LF in free trade.

10. Determine QC and QF in free trade.

11. Calculate the real wage rate, the real interest rate, and the real return on land in free trade.

12. Who are the home country’s winners and losers of the move from autarky to trade?

13. Calculate real total factor income in free trade.

14. Calculate free trade consumption of food and clothing.

15. Calculate exports and imports.

16. Determine the level of utility with free trade. Is the country better off due to international trade?

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