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8 Cards in this Set
- Front
- Back
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A country will GAIN from trade if… (PPF)?
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Consumes outside PPF and produces along PPF
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In Specific-Factors model, HOME has comparative advantage in manufacturing. After trade, what happens to return on capital for that sector?
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Increases faster
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SPECIFIC FACTORS MODEL:
Suppose HOME opens up to trade and now faces a higher price for the agricultural good and no change in the price for the manufactured good. What happens to: Labor employed in manufacturing Labor employed in agriculture Nominal wages Rental rate for capital used in manufacturing Rental rate for land used in agriculture |
Labor employed in manufacturing: DECREASE
Labor employed in agriculture: INCREASE Nominal wages: INCREASE Rental rate for capital used in manufacturing: DECREASE Rental rate for land used in agriculture: INCREASE |
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Can we say that a useful measure of the gains from trade is how far the production possibility frontier of a country shifts out once opening to international trade? Explain
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No. The PPF is determined by endowments and technology, which do not change due to trade. Only the consumption possibility frontier (i.e., budget line) shifts because of trade.
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SPECIFIC FACTORS MODEL:
If you know that the nominal income of capital and labor has fallen, then what can you say about the changes in the prices of manufactured goods and agricultural goods? |
Because the nominal income of capital has fallen, the relative price of manufactured goods has fallen. This means that either the nominal price of manufactured goods has fallen or the nominal price of agricultural goods has risen. Because the nominal wage of the mobile factor has fallen, the price of at least one of the goods must have fallen. This would be consistent with a fall in the price of manufactured goods and no change in the price of agricultural goods.
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Consider a massive influx of foreign capital to a small open economy like Vietnam. Discuss the impact (a) sectoral production and (b) factor prices.
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An influx of capital leads to an increase in the production of capital intensive products and a reduction in the production of labor intensive products in Vietnam (Rybcsyizki theorem). In the short run return to all sector specific factors like capital and land goes down and the return to the mobile factor (labor goes up). But in the long run there is no change in factor prices (based on HO model)
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Who wins and who loses in Poorestan (in the short run and in the long run) when she opens up to international trade.
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SR:
Exporting factor owners will experience an increase in their real incomes while importing fact owners will experience a decrease in their factor incomes. LR: The compensation principle states that as long as the total benefits exceed the total losses in the movement to free trade, then it must be possible to redistribute income from the winners to the losers such that everyone has at least as much as they had before trade liberalization occurred |
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Show the effect of an increase in labor endowment on wages and rents in the long run.
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1) ΔLbar increases, Qs Increases
2) Pc and Ps stay constant. Wage and Rental Rate do not change 3) MPL and MPK stay constant |
