Econ 331, Fall 2014, Midterm #1

Econ 331, Fall 2014, Midterm #1(blue), Sep 29 2014. 43 pts.

Problem 1. (14pts, 2 pts each)

Suppose two countries, Canada and Mexico, produce two goods, corn and televisions.

Assume that capital is specific to corn, land is specific to televisions, and labor

is free to move between the two industries. When Canada and Mexico engage in free

trade, the relative price of corn decreases in Canada and the relative price of televisions

decreases in Mexico. Finish the sentence for each of the cases below.

As a result of trade:

a. the Canadian real wage in terms of corn ________ ___________________

b. the Canadian real wage in terms of televisions ___ ________________________

c. the labor in Canada moves from _______________to________________________

d. the capital in Canada moves from _________________ to______________________

e. the real wage in Canada_____________________________

f. the real earnings of the owners of land in Canada _____ _________________

g. the real earnings of the owners of land in Mexico ______________ ____________

Problem 2. (11 points)Consider a 2(countries) x 2(sectors) x 2(factors) Heckscher-Ohlin model. Two countries are Home and Foreign, two sectors are Computers and Shoes. Below is the information for Home in autarky.

Computers: Sales revenue: P_CQ_C = 420

Payments to labor: WL_C = 200

Payments to capital: R_S K = 220

Shoes: Sales revenue: P_SQ_S = 180

Payments to labor: WL_S = 80

Payments to capital: RK_S = 110

a. (1 pt). In Home, which sector is capital intensive? ___________________________

Now imagine that Home and Foreign started to trade. Holding the output quantities in each sector, and the amounts of factors employed in each sector constant, suppose that as a result of opening up to trade, the price of shoes decreases by 4% while the price of computers does not change. Based on the information above, please provide the answers to the questions below. Wherever possible, please provide numerical answers.

b. (1 pt) What does Home export?______________________ .

c. (2 pts) What is the corresponding percentage change in nominal wages?

___________________________________________________________

d. ( 2 pts) What is the corresponding percentage change in the nominal rental rate of capital?

___________________________________________________________

e. (2 pts) What is the effect on the real rental rate of capital in terms of shoes?

________________________________________________________________

f. (3 pts) What is the effect on the real wages in terms of computers? Explain.

Problem 3 (8 pts, 2pts each). Consider a 2(countries) x 2(sectors) x 2(factors) Heckscher-Ohlin model. Two countries are Germany and Ukraine, two sectors are cars and trains, and two factors are labor and capital. Suppose when Ukraine and Germany start trading, Ukraine exports trains, a capital-intensive good and imports cars, a labor-intensive good.

According to the Heckscher-Ohlin 2(countries) x 2(sectors) x 2(factors) model:

a. Is Germany capital abundant or labor abundant? Briefly explain.

b. What is the impact of trade on the real wage in Germany? Briefly explain.

c. What is the impact of trade on the real rental on capital in Germany?

Briefly explain.

d. Which group (capital owner or labor) would support policies to limit free trade in Ukraine? Briefly explain.

Problem 4. (10 points, 2 points each) Assume that Home and Foreign produce two goods, TVs and cars, and use the information below to answer the following questions.

In the No-Trade Equilibrium

Home Country	Foreign Country
Wage TV=12	Wage C=?	(WageTV)*=?	(Wagec)*=6
MPL TV=4	MPL C=?	(MPLTV)*=?	(MPLc)*=2
P TV=?	P C=2	(PTV)*=2	(Pc)*=?

a. What is the (MPL_TV)^* in the no-trade equilibrium?______________________________

b. Foreign has absolute advantage in _______________________________

c. Foreign has comparative advantage in _____________________________________

d. In the trade equilibrium, the real wage in Foreign in terms of TVs ______________

e. In the trade equilibrium, do Foreign workers earn more or less than those in Home in terms of their ability to purchase goods?

__ ___________________________________________________________________________