Download International Economics Problem Set 2 1. Spain is a small, open

International Economics
Problem Set 2
1.
Spain is a small, open economy that trades commodities X and Y in the world market
at the fixed terms of trade 1X: 2Y. Spain is endowed with 37,200 units of labor and
18,000 units of capital. At the current equilibrium, the optimal coefficients of
production are as follows.
Labor
Capital
X
4
3
Y
5
1
Assume also that Spain consumes commodities in the fixed proportion 1X: 1Y at all
conceivable prices.
a. Determine Spain's labor and capital constraints.
b. Determine Spain's outputs of X and Y.
c. Determine Spain's consumption of X and Y.
d. Determine Spain's exports and imports of X and Y.
e. Suppose that through capital accumulation Spain's supply of capital increases to
18,440 units. How does this capital accumulation affect Spain's production,
consumption, exports, and imports of X and Y?
f. Illustrate your conclusions graphically.
2.
Consider the standard Heckscher-Ohlin model, but suppose that the production
function of steel is identical to the production function of cloth. All other
assumptions of the Heckscher-Ohlin model remain valid.
a. What does the identity of production functions between steel and cloth imply about
the shape of the production-possibilities frontiers of America and Britain?
b. Is there a basis for trade between America and Britain?
c. Explain the implications of the identity of production functions between steel and
cloth (not just between countries) for the following theorems: Heckscher-Ohlin,
factor-price equalization, Rybczynski, and Stolper-Samuelson.
3.
Germany and Japan share the same Leontief-type, fixed-coefficient technology in
which one unit of commodity X requires 5L and 1K, and one unit of commodity Y
requires 3L and 2K. Germany is endowed with 2,900L and 1000K; and Britain is
endowed with 3,550L and 1,200K.
a. Which is the labor-intensive commodity?
b. Which is the labor-abundant country?
c. Assume that tastes in both Germany and Japan are given by the same utility
function, U = XY. Determine each country's autarkic price-ratio and the
equilibrium terms of trade under free-trade conditions.
4.
Greece and Italy produce under constant returns to scale two commodities, food (F)
and clothing (C). Greece is labor abundant relative to Italy (on both the physical
criterion and the economic criterion), and clothing is labor-intensive relative to food
at all wage-rent ratios. An initial international equilibrium is disturbed by a shift in
demand in favor of clothing. What long-run effects can you predict on the following
variables?
a. The equilibrium terms of trade.
b. The outputs of food and clothing in Greece and Italy.
c. The marginal physical products of labor and capital in each industry.
Copyright of McGraw Hills