Homework Task # 2 ECF3121 due by 10 am on Monday September 23

Question 1
a. Production possibilities frontiers in the Ricardian model are straight lines with end
points showing a country’s production when it produces only one or the other good.
True or False? Explain your answer.
b. Poland (POL) requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor
to produce a bushel of wheat. The Czech Republic (CZR) requires 6 hours of labor to
produce 1 ton of coal and 1 hour of labor to produce a bushel of wheat. In free trade,
the Czech Republic exports coal. True or False? Explain your answer in details.
c. Suppose that land is specific to agriculture, capital is specific to manufacturing, and
labor is mobile between sectors. A decrease in the price of agriculture leads to a lower
nominal wage and fewer workers employed in the manufacturing sector. True or
False? Explain your answer.

Question 2
Assume a Heckscher-Ohlin (HO) model of trade. Germany (GER) and Italy (ITA) produce
motorcycles (M) and textiles (T) using two factors, capital (K) and labor (L), that are mobile
across sectors. The production of motorcycles is capital intensive and that of textiles is labor-
intensive. Let Germany and Italy relative supplies be represented in the diagram below:

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Homework Task # 2 ECF3121 due by 10 am on Monday September 23

a. Which country is relatively capital abundant? Explain your answer.

b. Add to the question diagram the relative demand of motorcycles in Germany and
Italy. Label them RDGER, RDITA, respectively.
c. Which country has a comparative advantage in textiles? Which one in
motorcycles? Explain your answer.
Now suppose countries are free to trade.
d. Describe the patterns of trade. Are these consistent with the HO theorem? Explain
briefly.
Question 3
Continuing from question 2.
a. Add to the diagram you have drawn answering question 2 the world relative supply
and relative demand of motorcycles. Label them RSW and RDW respectively.
b. What is the World relative price of motorcycles? Show it clearly in the diagram and
label it (PM/PT)W.
c. What happens to terms of trade of each country going from autarky to free trade?
d. What is the relative quantity of motorcycles produced by Italy at the world price?
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Label it !!
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Question 4
Assume a Heckscher-Ohlin model of trade. Alpha (A) and Beta (B) produce two goods pipes
(P) and cars (C). Alpha is relatively capital abundant. Let the diagram below represent the
relative demand for labor in each industry.

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Homework Task # 2 ECF3121 due by 10 am on Monday September 23

a. Which industry is capital intensive? Explain your answer.

b. Given relative factor endowments which country has a higher w/r in autarky?
c. Which country uses more capital-intensive techniques of production in autarky? Does
this make economic sense?
Now assume that countries are free to trade.
d. What happens to the techniques of production of Alpha going from autarky to free
trade?
e. In Alpha, is capital or labor better off going from autarky to free trade? Explain your
answer.

Question 5
In the folder homework task # 2 you will find an article with title “Collateral Damage” from
the Economist, issue of July 30th 2016. After having read this article, answer the following
questions:
a) What is the main objective of this article?
b) How was the British labor market affected by China’s accession to the WTO in 2001?
c) Did the British government implement any policy to redistribute some of the gains
from trade to worse off workers?
d) Should the government have done more to improve the distribution of the gains from
trade? If yes, what. If no, explain why.