International Economics HW 6

NYU, Spring 2012, Instructor: Tai Young-Taft

Q.1 Consider the setup from Ch. 5 in our book.

a. If there is a rise in relative price of cloth, how can both industries reduce

relative use of L to K while employing their entire endowment of resources?

Why is this the case?

b. Articulate possible transfer of K and L between industries using Equa-

tion (5A-1) from the book. Discuss each movement's eect on price of the factor

moving between industries. Do we have any reason to believe a particular trans-

fer will increase or decrease factor costs more or less than any others? What, if

anything, does this say about aggregate movements in market pricing of capital

and labor?

Q.2 (from Midterm Fall 2008) For this problem, consider the Heckscher-Ohlin

model from our textbook. Let the two goods being produced be cloth, C, and

food, F, and let the two factors of production be land, T, for `terra', and la-

bor, L. Let the relationship between relative price of cloth, PC=PF , for PC and

PF equal to the price of cloth and food respectively, and the wage-rental ratio,

w=r, for w and r equal to the cost of a unit of labor and land respectively,

be given by: (PC=PF )2 = w=r. Furthermore, let the relationship between w=r

and the land-labor ratio used in the production of cloth, TC=LC, be given by

w=r = 2(TC=LC) and let the relationship between w=r and the land-labor ratio

used in the production of food, TF =LF , be given by w=r = (3=2)(TF =LF ) ? 2.

a. If the relative price of cloth increases from 1 to 2, by how much does the

land-labor ratio used in the production of cloth and food increase? Use a graph

to illustrate this change, numerically indicating the changes.

b. If the total labor supply in a particular country equals 100 hours and

the total land supply equals 240 acres, how much land and labor is used in the

production of each good after the increase in the relative price? Illustrate this

with a correspondent graph.

Q.3 Suppose that at current factor prices cloth is produced using 40 hours

of labor for each acre of land, and food is produced using only 8 hours of labor

per acre of land.

a. Suppose that the economy's total resources are 320 hours of labor and 20

acres of land. Use a diagram and some algebra to determine the allocation of

resources. (It doesn't necessarily have to be to scale.)

b. Say there is a bumper crops in births for some astrological reason, and

the labor force increases 10% from 320 hours to 352 hours. Amend the diagram

and use similar algebra to gure out what happens again.

4. (from Midterm Spring 2011) a. Describe Chang's distinction between the

`historical induction' approach versus the `deduction' approach to economic sci-

ence. Which does he prefer and why? What does Chang have to say about

how dierences in these modes of analysis enables him to come to dierent con-

1

clusions than those present in microeconomics and our Krugman and Obstfeld

text?

b. To what extent does Chang claim there is a coherent strategy to employ

regarding development, as it applies to the `now developed countries' as well

as Japan, Taiwan, and Korea? Why do these historical policy sets constitute

`coherent or incoherent strategies'? Explain in as much detail as possible what

this strategy is, or if there is no such strategy, what one would have to do

to substantiate the existence of such a strategy. Be sure to explicitly include

as many pertinent policies as possible and their relationship (or the type of

relationship that would need to be demonstrated) in your account.

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International Economics HW 7

NYU, Spring 2012, Instructor: Tai Young-Taft

Q.1 a. Go back to Q.3 from HW 6. For the diagram in part a. put the

total allocation of labor on the x-axis and the total quantity of land on the

y-axis, and call the origin the cloth-origin. Now, as in an Edgeworth box (if

you don't know what this is, look it up) put a dierent origins (the food-origin)

above the total allocation of labor and to the side of the total allocation of

land, with axes going in opposite directions, so with the quantity of labor axis

going from right to left, and the quantity of land axis going from top to bottom.

Draw lines from the origin with slopes indicating share of K relative to L used

in production of each good and use this diagram to demonstrate allocation of

factors to production of each good. How is this graph dierent yet consistent

with the graph you used in HW 6 (if you used the same graph, come up with

some dierent graph and comment accordingly)? Undertake part b. from the

same question using the same diagram.

b. In the setup for Q.3 a. from HW 6 is it possible for the land to labor

utilization ratios in both sectors to be equal to 1=16? What are possible depic-

tions of the graphs (as in a. above in this HW) in this case? If this is possible

and the case what does this imply about the allocation of resources between

the dierent sectors? What will be the relationship between the ratio of cost

of labor to cost of land (w=r) relative to industry specic ratio of utilization of

labor to land (L=T) look like in the w=r-by-L=T plane?

c. In the same setup, is it possible for the land to labor utilization ratio to

be greater/less than 1=16 in both industries? What if they have the same slope

that is greater than/less than 1=16?

Say, for example, the labor to land utilization ratio was 1=4 for food and

1=12 labor to land utilization ratio for cloth. Can we determine the allocation

of resources to dierent industries in this case?

d. What implications would the increase in labor (per the above) does this

have for a country's specialization in trade if before the population boom they

had exactly two countries (the whole world) had the same amount of resources?

Assume substitutability of factors and decreasing marginal productivity of both

factors, as well as homogeneous preferences across countries, and identical tech-

nologies across countries. Illustrate this idea with a graph.

Q.2 (from Midterm Spring 2010) For this problem, consider the Heckscher-

Ohlin model from our textbook. Let the two goods being produced be 

ubber,

F, and blubber, B, and let the two factors of production be oil, O, and whales,

W. Furthermore, let H be oil abundant, and F be whale abundant, and let

 

ubber be an oil-intensive industry and blubber be a whale-intensive industry.

a. (2 points) Graph the relationship between the price of 

ubber, PF , relative

to blubber, PB, and the unit cost of oil, o, relative to the unit cost of whale, w.

Why is the graph shaped this way?

b. (4 points) Now graph the relationship between the unit cost of oil relative

1

to the unit cost of whale and the whale-relative-to-oil utilization ratio for both

industries. Why are these graphs shaped this way? Is there any dierence in

the shape of them? If so, why is there such a dierence?

c. (2 points) Indicate the eects of a rise in the relative price of 

ubber

on the graphs, in particular in terms of the unit cost of 

ubber-to-unit cost

of blubber ratio, and the whale-oil utilization ratio. Is there a dierence in

magnitude of change in either of the two industries' equilibrium? If so, what

accounts for that dierence?

d. (4 points) Given this setup, what are the general possible patterns of

trade (you won't be able to give exact numbers)? Why will these be the possible

patterns?

c. (4 points) What are the net welfare eects of trade on each country?

On each industry (F and B) in each country? On the owners of the factors of

production? What causes these eects?

d. (2 points) Discuss some of the main results of statistical tests of the

Heckscher-Ohlin model as presented in our text.

Q.3. In the case of `North-South' trade and wage inequality as discussed in

our textbook is it possible for a country to have (1) high-skill biased technolog-

ical progress while (2) redistributing income from high-skill earners to low-skill

earners due to opening of new trade? If possible or not possible, illustrate

graphically with (1) relationships between relative price of high-skill intensive

product to low-skill intensive product and relative high-skill to low-skill wage

(in the plane of the same variables) and (2) relative wage of low-skill to high-

skill labor by relative utilization of low-skilled and high-skilled labor (in the

plane of the same variables). If possible explain plausible magnitudes (rela-

tive to necessary eects) of movements in key variables that may generate such

dynamics.

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