ECO Test 2

Specific factors model def

assumes an economy that produces two goods and that can allocate its labor supply between two sectors , allows for existence of factors of production beside labor like ricardian model (not the second part)

For trade to take place, a country must face a world relative price that is

different from the relative price that would prevail in the absence of trade

Given the decrease in the supply of capital for home, the relative supply of home is further to the ___

left than the relative supply for foreign. AS a result, the relative price of good 1 is higher in home than it is in foreign

Which of the following is not a possible explanation for why the relative supply curve for the world might be different from that for a specific factors economy? The other countries in the world could have different

level of relative demand

Within each country that opens itself to international trade

some factor owners gain, but other factor owners lose

In each sector of a specific factors, economy, profit maxizing employers will demand labor up to the point where

the marginal product of labor times the price of the product equals the wage rate

Assuming this country engages in trade and ends up importing food, which of the following expressions reveals (Df-Qf) its imports of food?

(Pm/Pf) * (Qm-Dm)

2 main reasons why international trade has strong effects on the distribution of income

1.) resources cannot move immediately or without cost from one industry to another- short run consequence of trade 2.) industries differ in the factors of production they demand

Unlike the simple Ricardian model, the specific factors model

Assumes an economy that produces two goods and that can allocate its labor supply between the two sectors

Suppose the country begins to trade. Which of the following statments describes the production changes that will occur inside this country.

Coal output rises and sugar output falls

The quantity of direct foreign investment by the United States into Mexico has increased dramatically during the last decade. How would you expect this increased quantity of direct foreign investment to affect migration flows from Mexico to the United States, all else being equal?

Direct foreign investment has increased the amount of capital per worker in mexico. This will increase the marginal proud of labor and increase the real wage, which should slow the flow of labor from mexico

suppose a specific factors economy produces two goods: A and Y. Given that the economy is open to trade, and assuming that D is consumption, Q is production, P is price, the budget constraint can be defined as

Dx-Dx=(Py/Px) * (Qy - Dy)

Suppose the United States happens ti be the world's most capital-abundant country. According to the facotr-proportions model the U.C. would be expected too

Export capital intensive good and impot labor intensive goods

Evaluate the following statement "The world's poorest countries cannot find anything to export. There is no resource that is abundant- certainly not capital nor land, and in small poor nations not even labor is abundant" The above statement is

False because what matters for trade is the relative abundance of factors

How is this possible when the wages of skilled labor are rising in the Unitest States as a whole

In the short run, programmers with specific skills that compete with Indian workers may face wage cuts, which in the long run, programming in general becomes more effiecnt, which can increase wages for others in the industry

Which of the following arguements would trade economists make against seeing these wage cust as a reason to block outsourcing of computer programming

It is possible for those who gain from outsourcing to compensate those who lose. Allowing programming to be down more cheaply expands the production possibilities frontier of the US, making the entire country better off on average the income distribution effects from outsourcing are not specific to international trade

Owners of

Land in home and owners of capital in Foreign will benefit from trade, while owners of capital in Home and owners of land in foreign will be hurt

Assuming a specific factors economy produces two goods, cloth and food, and that when representing this economy graphically, cloth is on the x-axis and food is on the y-axis. For trading economy

The budget constraint is tangent to the production possibility frontier at the chosen production point

In the discussion of empirical results on the Heckerscher-Ohlin model, we noted that recent work suggests that the effeciceny of facorts of production seems to differ internatioally. Explain ow this would affect the concept of factor-price eqaluzation

The model would be apploed to "effective facotrs" which adjust for the differences in effeiency. In this case effective facotr prices would be equalized

The U.S. labor movement- which mostly represents blue-collar workers rather than professional and highly educated workers- has traditionally favored limits on imports from less-affluent countries. Is this a shortsighted policy or a rational one in view of the interests of union members? How does the answer depend on the model of trade?

Using the Ricardian model, this policy would not be rational. However considering the Heckscher-Ohlin model, which specifically addresses income distribution, unskilled labor, the scarce resource, lose from trade

In the United States where land is cheap, the ratioof land to labor used in cattle raising is higher than that of land used in wheat growing. But in more crowded countries, where land is expensive and labor is cheap, it is common to raise cows by using less land and more lanor than Americans use to grow wheat

Yes, as long as the ratio of land to labor for cattle production exceeds the ratio in wheat production in that country

3 assumption crucial to the prediction of factor price equalization are in reality certainly untrue

both countries produce

3 assumption crucial to the prediction of factor price equalization are in reality certainly untrue

both countries produce both goods technologies are the same trade actually equalizes the prices of goods in the two countries

Mobile factor

can move between sectors and those factors as assumed to be SPECIFIC -which means they can be used only in production of particular goods

The diagram to the right shows the home economy's pretrade equilibrium at point Z In this closed economy, it is the case that

consumption cannot occur anywhere outside the production possibilities frontier

Show how the decrease in the supply of the capital for home affects it production possibility frontier

draw the opposite line

The graph to the right depicts a specific factors economy that produces two goods: cloth and food. Assuming that the country is open to trade, at the higher relative price (Pc/Pf)2, the economy

exports cloth and imports food double line import longer line

When opening up to trade, an economy

exports the good whose relative price has increased and imports the good whose relative price has decreased

If those two economies open up to trade, what will be the pattern of trade? If both counties open to trade, home will export

good 2 and foreign will export good 1

While trade may benefit a nation it hurts

groups within the country in the short term and still hurt in the long term but not as much

diminishing returns

if the labor input is increased without increasing capital as well. adding a worker means less capital to work with

Assume a speific facotrs economy produces two goods, cloth and food, and that when representing the output of the economy graphically, cloth is on the x-axis and food is on the y-axis and food is on the y-axis when the price of cloth increases by 7% and the price of food does not change

marginal product of labor in the cloth sector falls

The diagram to the right shows the Home economy's pretrade equilibrium at point X. If this economy opens itself to trade, its consumption point

may deviate from its production point Now suppose that trade commences between home and the rest of the world and as a result, the relative price of coal in Home rises

Suppose the inital allocation of labor as OL workers in Home OL workers in foriegn. given this inital allocation, labor can be expect to

migrate from home to foreign

Trade has ambiguous effects on

mobile factors

biased expansion of production possibilities

occurs when the production possibility frontier shifts out much more in one direction than in the other

In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana, 1986 was a year of economic decline. Why? In Texas and Louisiana, 1989 was a year of economic decline because in these states,

oil production was reduced

When an economy is open to trade, the relative price of a good is determined by the

relative supply and demand for the world

Marginal product of labor

the addition to output generated by adding one more person-hour

Trade hurts

the factor that is specific to the import- completing sectors

Larger the input the for given capital supply

the larger the output

Which part of Home's budget constraint would represent choices in which home's residents are unambiguously better off compared to their pretrade equilibrium?

the portion inside the shaded region

What does the production function tell us

the quantity of the product that can be produced given any input of capital and labor the equation is: Qc= Qc(K,Lc) Qc is economy output of cloth K economy capital stock Lc labor force employed in cloth For Food Qf=Qf(T,Lf) Labor equation: Lc+Lf =L

Heckscher-Ohlin Theory

theory emphasizes the interplay between the proportions in which different factors of production are available in different countries and the proportions in which they are used in producing different goods aka Factor proportions theory

Although trade creates gains for some and losses for others, economists do not, generally, stress the income redistribution effect of inernational trade. Which of the following is not a reason why economist tend to de-emphasize the impact of international trade on the distribution of income?

those that lose from trade tend to be marginally impacted by trade, poorly organized, and largely devoid of political influence