EC340 Exam 1 (3&4)

If country H has a comparative advantage in X, then it must be the case that

(Hx/Hy)<(Fx/Fy)

What is the shape of the PPF in the HO model and why?

The PPF is curved, representing changing opportunity costs

In the HECKSCHER-OHLIN model trade happens because of differences in:

factor endowments and prices

Suppose Home exports X and imports Y. What could cause welfare for Home to go down?

A decrease in the price of the good Home exports.

In the Ricardian model with cloth and wine discussed in class, if Home exports cloth and imports wine and the relative price of cloth in terms of food falls, what happens to Home's welfare?

A fall in the relative price of cloth in terms of wine will reduce Home's welfare

Having a lower unit labor requirement in an industry means having...

A higher labor productivity

What is the concept of "diminishing marginal product" of inputs?

An additional units of a factor produce less units of output than the unit added before it

In the two-good two-country Ricardian model studied in class, if Home has a comparative advantage in cloth rather than wine, then Home exports and imports what?

Exports cloth and imports wine

In the Heckscher-Ohlin model, why is the production possibilities frontier curved?

Because of the diminishing marginal product assumption

In a two-good two-country Ricardian Model with countries Home and Foreign and with two goods, aLC and aLW are unit labor requirements for cloth and wine in Home and a°LC and a°LW are the same in Foreign. Suppose that after Home and Foreign open to trade, aLW/aLC < PW/PC < a°LW/a°LC. Then who specializes?

Both countries

In the two-country, two-good Ricardian model discussed in class, the basic impetus for trade between nations is:

Differences in technologies of production

True or False: In the Ricardian model, a country always produces only the good it has a comparative advantage in producing.

False

True or False: The world PPF is a straight line with a constant slope

False

In the two-good, two-country Ricardian Model discussed in class, with cloth and wine, when Home has comparative advantage over Foreign in cloth, who has the comparative advantage in wine?

Foreign

What is always true about gains from trade in the Ricardian model studied in class?

Gains from trade only occur if prices change relative to Autarky prices

The Ricardian model predicts that after trade...

Goods' prices equalize across countries

In the production function and along the PPF of the HECKSCHER-OHLIN model, the opportunity cost of producing cloth is higher or lower the more cloth is produced?

Higher

In the cloth industry, when the amount of labor increases but the amount of capital remains fixed, the overall output of the industry will be [ ], and the output of each worker (i.e. the marginal product of labor will be [ ].

Higher, lower

In the two-good, two-country Ricardian Model discussed in class, with cloth and wine, when Home has comparative advantage over Foreign in cloth, where is the Autarky relative price of cloth in terms of wine lower?

Home

In the two-good, two-country Ricardian model with countries Home and Foreign and goods C and W, assume that unit labor requirements are such that aLC/ aLW <a°LC/ a°LW where aLC and aLW are unit labor requirements for C and W in Home and a°LC and a°LW are the same in Foreign. Home and Foreign are currently trading and you observe that the relative price ratio in world equilibrium is equal to a°LC/ a°LW. Then, who specializes in what?

Home specializes in cloth production

Under what conditions would there be no gain from trading for either country in a Ricardian model?

If both countries share the same technology of production.

In the two-good, two-country Ricardian model with cloth and wine discussed in class, if Home exports cloth and imports wine, then it must be the case that a fall in the relative price of cloth does what to home's welfare

Reduces home's welfare

In the Ricardian Model studied in class, with countries Home and Foreign and with two goods under trade, assume aLC/ aLW <a°LC/ a°LW where aLC and aLW are unit labor requirements for cloth and wine in Home and a°LC and a°LW in Foreign. Suppose a balanced productivity catch-up occurs in Foreign, i.e. a°LC and a°LW both decrease proportionately but a°LC/ a°LW does not change. Then it is possible that home's terms of trade do what?

Improve

In the two-country, two-good Ricardian model, a country has absolute advantage in both goods if and only if

Its unit labor requirement is lower for both goods.

In the Ricardian model studied in class, a country has comparative advantage in producing a product if its cost of production, in terms of foregone units of the other good, is what?

Lower than that same cost in foregone units of the other good in the other country

Does the Ricardian model imply that it is bad to trade with low wage countries?

No, wages at home are reflective of the home country's labor productivity.

In the two-good two-country Ricardian trade model studied in class with goods w and c, and unit labor requirements aLc and aLw and prices Pc and Pw, which of the following conditions must hold in Autarky in order for a country to produce in both industries?

Pc/Pw = aLc/aLw

What two things are necessary for a country to gain from trade in the Ricardian model

Price changes relative to domestic autarky prices, and the country must specialize in the production of one good

How are prices set in the autarky equilibrium of the two-good two-country Ricardian Model studied in class?

Price ratio = unit labor cost ratio

What measures the terms of trade in Ricardian model?

Ratio of world prices

English workers can produce 6 pieces of cloth per day or 5 bottles of wine. Portuguese workers can produce 4 pieces of cloth or 4 bottles of wine. What is England's opportunity cost for producing 1 piece of cloth? 1 bottle of wine?

The opportunity cost of producing 1 piece of cloth is 5/6ths a bottle of wine, The opportunity cost of producing 1 bottle of wine is 6/5ths a piece of cloth

In the Ricardian Model studied in class, with countries Home and Foreign and with two goods under trade, assume aLC/ aLW <a°LC/ a°LW where aLC and aLW are unit labor requirements for cloth and wine in Home and a°LC and a°LW in Foreign. Suppose a Home-export biased catch-up occurs in Foreign, i.e. a°LC decreases. What happens to the relative price of cloth?

The relative price of cloth (vs. food) may go down.

In the two-good, two-country Ricardian model studied in class, it is certain that a country has comparative advantage in production of a good if, when opening up to trade, what happens to the relative price of that good and why?

The relative price of that good rises, since the cost of that good, in terms of foregone units of the other good, is higher abroad.

In the Ricardian Model studied in class, with countries Home and Foreign and with two goods under trade, assume aLC/ aLW <a°LC/ a°LW where aLC and aLW are unit labor requirements for cloth and wine in Home and a°LC and a°LW in Foreign. Suppose a Home-export biased catch-up occurs in Foreign, i.e. a°LC decreases. What happens to Home's terms of trade?

The terms of trade of Home may remain unchanged.

True or False: In the data there is a correlation between wages and productivity at the national level

True

True or False: Technological improvements in Foreign only hurt Home if they are biased towards Home's export

True

True or False: The Ricardian model predicts wages across countries are correlated with labor productivity differences.

True

True or false: In the two-good, two-country Ricardian model, it is impossible to have comparative advantage in the production of both goods.

True

True/ False: In the Ricardian model, the only way both countries gain from trade is if there is complete specialization

True

In a two-good, two country Ricardian model, when does a country have comparative advantage in a particular industry?

When it can produce a good at a lower opportunity cost

In the Ricardian model, when do workers gain from trade?

When one industry shuts down