International trade

EC 370 Assignment 2

Specific-Factors Model

Due May 23, 2016

1. (70 points) Decide if the statement is true or false. Explain briefly. No need to write a short essay under each question, but you need to get the key points through. Stating only T or F (correctly) without justification will only give you 1 point out of 10 points. Consider the following Specific Factors model. Suppose two countries, Home and Foreign, produce two goods, timber and televisions. Assume that land is specific to timber, capital is specific to televisions, and labor is free to move between the two industries. When the Home country moves into doing free trade with the Foreign country, the price of TV rises in Home and the price of timber remains unchanged.

(a) (10 points) Foreign exports timber to Home under free trade.

(b) (10 points) Home produces only TV under free trade.

(c) (10 points) Labor employment increases for the TV industry in Home.

(d) (10 points) The workers’ purchasing power for timber increases in the Foreign country.

(e) (10 points) Capital owners are better off under free trade in the Home country.

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(f) (10 points) After free trade, the rental rate for land increases relative to the price of TV in the Home country.

(g) (10 points) The marginal product of labor for the timber industry increases under free trade in the Home country.

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2. (30 points) Two countries, Home and Foreign, produce computers from capital and labor and shoes from land and labor. Labor is mobile between the two industries. The no-trade equilibrium in the two countries is illustrated in the diagram below.

(a) (10 points) In the diagram above, show a candidate equilibrium if the two countries are trading with each other. Indicate how production and consumption have changed in the two countries.

(b) (10 points) How has the real rental to capital changed in Foreign?

(c) (10 points) What happens to the demand for land in Home?

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