Exam 5: Who Gains and Who Loses From Trade

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r Price of cloth = 2w + 1r According to this information, which of the following statements is true?

When factors of production move to better-paying sectors of the economy following the opening of trade in the country, wages and rents will be bid back to their pre-trade levels.

The Stolper-Samuelson theorem indicates that given certain assumptions and conditions:

If trade corresponds to the Heckscher-Ohlin theory, which of the following is most likely to happen in the long run after a labor-abundant country engages in free trade?

With free trade, if country X is relatively labor abundant and relatively land scarce and country Y is relatively labor scarce and relatively land abundant, the factor-price equalization theorem predicts that:

According to the factor-price-equalization theorem, free trade between any two countries equalizes:

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r Price of cloth = 2w + 1r If the initial prices of wheat and cloth are $3 per unit, the labor cost per unit of wheat output is_____ and the rental cost per unit of wheat output is _____.

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. Which of the following is most likely to happen in the short run following the opening of free trade between the countries?

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. According to H-O theory, country A has a comparative advantage in the production of: 1 pound of bread 1 gallon of wine Capital input 5 units 20 units Labor input 4 units 10 units

Suppose country Y produces only corn and clothing using only two inputs- land and labor. Production of corn requires an intensive use of land whereas, clothing is a labor-intensive good. If the price of corn increases by 15 percent, the price of clothing remaining constant, the Stolper-Samuelson theorem predicts that in the long run:

International outsourcing-the shifting of service activities from one country to another-was not an issue when the factor-price-equalization theory was developed. Does the existence of outsourcing change the implications of the theory? Justify your answer.

Considering the United States to be a capital-abundant country, which of the following facts would contradict the predictions of the Heckscher-Ohlin theory?

Factor-price equalization theory predicts that post trade the input prices within a country will equalize.

According to the Stolper-Samuelson theorem and the Heckscher-Ohlin theory, the opening of trade will ultimately lead to lower real wages in a land-abundant country.

As a result of the North America Free Trade Agreement (NAFTA), the United States and Canada have shifted to free trade with Mexico. It is assumed that Mexico has an abundance of unskilled labor while the United States and Canada have an abundance of skilled labor. According to the Stolper-Samuelson theorem, how this shift will affect the real wage of unskilled labor in Mexico and the real wage of unskilled labor in the United States and Canada? Also explain the impact on the real wage of skilled labor in Mexico and skilled labor in the United States and Canada.

Hollywoodland, being self-sufficient in most products, trades only two goods with the Rest of the World (ROW), movies and automobiles. Both of these goods are produced using skilled labor (L) and capital (K) with the returns to capital being the interest rate (r) and the returns to skilled labor being the wage rate (w). The production of automobiles is capital intensive relative to the production of movies and Hollywoodland is skilled-labor abundant relative to the ROW. A)State the Heckscher-Ohlin theorem and use it to predict the pattern of trade between Hollywoodland and the ROW B)If the price of Hollywoodland's imports rises, the price of its exports remaining unchanged, what would happen to the factor returns in Hollywoodland? State the theorem used to explain the answer and, briefly state the intuition behind the theorem. .

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. The pre-trade wage rate relative to land rents in Alpha is _____ the relative wage rate in Beta.

Let us assume that cloth-making (labor-intensive) and farming (land-intensive) are the only two sectors of production in a country. If this country is labor-abundant, and if trade corresponds to the Heckscher-Ohlin theory, which of the following groups will gain in the short-run, but lose in the long-run, from the opening of trade?

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r Price of cloth = 2w + 1r If the initial prices of wheat and cloth are $3 per unit then:

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r Price of cloth = 2w + 1r Suppose country A engages in free trade and the price of cloth increases to $4 per unit. However, the price of wheat remains unchanged. Under such a situation, the Stolper-Samuelson theorem will predict that: