– Problem Set 2 Econ 355 – Introduction to International TradeDescriptionSolution downloadThe…

– Problem Set 2 Econ 355 – Introduction to International TradeDescriptionSolution downloadThe QuestionProblem Set 2Econ 355 – Introduction to International Trade 2015-2016 Winter Term 2Due Thursday February 4th 2015 before the start of class1 True/FalseFor each of the following statements say whether it is true or false and explain why using a couple of sentences, graphs or equations.(a) ?In the specific factors model, a simultaneous 10% increase in the price of Manufacturing and 10% increase in the price of Agriculture would make owners of both capital and land better off.(b) ?In the specific factors model, suppose mobile workers only consume Agricultural products but do not buy Manufactured goods. If you know that workers lose from opening to trade, then land owners must benefit from opening to trade.2 Specific Factors ModelConsider the Specific Factors model of trade. Take a country, Germany, that produces two goods, Cars (C) and Sausages (S). Production in each sector requires capital (K), which is perfectly mobile across sectors, and labor which has skills specific to each sector: mechanical engineers (LC) can only produce Cars and food engineers (LS) can only produce Sausages.(a) ?Consider the autarky equilibrium in Germany.(i) ?Show in a graph similar to Figure 3-3 from the textbook what an autarky equilibrium looks like. Put Cars on the horizontal axis and Sausages on the vertical axis. Clearly label the axes, PPF, production point, consumption point, and relevant indifference curves.(ii) ?What is the relationship between the relative price of Cars and the marginal product of capital in the two sectors in equilibrium?(b) ?Suppose that after Germany opens up to trade the price of Sausages falls by 25% while the price of Cars remains unchanged.(i) ?Show in a graph you have drawn in part (a)(i) what the trade equilibrium looks like.(ii) ?Does Germany have a comparative advantage in Cars or in Sausages?(iii) ?Which Good is Germany exporting and which good is it importing?(iv) ?What happens to the number of food engineers and capital stock producing Sausages (compared to autarky)? What happens to the number of mechanical engineers and capital stock producing Cars?13(v) What happens to the real return to capital in terms of Cars ( R ) and in terms of Sausages PC( R )? What happens to the real wage of mechanical engineers in terms of Cars (WC ) PS PCand in terms of Sausages (WC )? What happens to the real wage of food engineers in PSterms of Cars (WS ) and in terms of Sausages (WS )? PC PS(vi) ?Rank in an ascending order the percentage change in prices and in returns to factors, i.e., ?PC, ?PS, ?R ?WC ?WS. PC PS R WC WS(vii) ?Does Germany as a whole gain from trade?(viii) ?Is there any group that would be against opening to trade?(c) Suppose that starting in the trade equilibrium Germany allows some Polish mechanical engi- neers into the country. For simplicity assume that the resulting changes in German production do not affect the prices of Cars and Sausages (i.e. PC and PS do not change).(i) ?What happens to production of Cars and Sausages?(ii) ?Would this immigration benefit or hurt the capital owners? Food engineers? Native German mechanical engineers?Data ExerciseThe goal of this exercise is to calculate relative factor abundance and relative factor intensities for two countries and two sectors. Go to the website of World Input-Output Database at www.wiod.org and download the July 2014 release of Socio-Economic Accounts (direct link: http://www.wiod. org/protected3/data/SEA/WIOD_SEA_July14.xlsx). We will focus on data for two countries, Germany (code DEU) and Poland (code POL), for the year 2007.(a) ?Find the number of persons engaged (EMP, a measure of employment) and the real fixed capital stock (K_GFCF, a measure of capital) used by the entire economy (TOTAL INDUS- TRIES, code TOT) in Germa

 

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