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02_ProblemSet_2

The document is a problem set focused on the Heckscher-Ohlin Model in international economics. It includes questions on factor mobility, production characteristics, resource allocation, and the effects of price changes on wages and rental rates. The problems require analysis of labor and land utilization in the production of cloth and food under various scenarios.

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2 views1 page

02_ProblemSet_2

The document is a problem set focused on the Heckscher-Ohlin Model in international economics. It includes questions on factor mobility, production characteristics, resource allocation, and the effects of price changes on wages and rental rates. The problems require analysis of labor and land utilization in the production of cloth and food under various scenarios.

Uploaded by

isayevanezrin1
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Dr.

Alexandra Seidel
Introduction to International Economics

Problem Set 2

The Heckscher-Ohlin Model

1. Which of the following characterize the Heckscher-Ohlin Model?


(a) Perfect mobility of factors across industries
(b) Perfect mobility of factors across countries
(c) Constant returns to scale
(d) The law of diminishing returns
(e) Identical technologies across industries
(f) Monopolistic competition
(g) Perfect competition
(h) Full employment

2. Suppose Home (H) is producing two goods, cloth (c) and food (f), with two factors of pro-
duction, Labour (L) and Land (T). The quantities of L and T used to produce one unit of each
good are given as follows:
Units of labour (L) used to pro- Units of land (T) used to produce
duce one unit of one unit of
Cloth (C) aLC = 5 aTC = 2
Food (F) aLF = 1 aTF = 1

(a) Show which sector is labour-intensive and which sector is land-intensive.


(b) Suppose that the economy’s total resources are 100 hours of labour and 50 acres of
land. Plot the country’s production possibility frontier (without factor substitution).
What does the slope of the frontier indicate?
(c) Calculate the number of workers employed and the amount of land used in each in-
dustry in autarky equilibrium.
(d) Calculate the autarky production for each industry.
(e) Now suppose that the land supply increases to 80 acres.
i) If prices of both goods are the same, what is the new allocation of resources in
the country?
ii) How many units of cloth and food will Home produce now? Is your answer con-
sistent with the Rybczynski theorem?
(f) Assume the prices of cloth and food are given as follows: 𝑝𝐶 = 14; 𝑝𝐹 = 4
i) What is the nominal wage (w) and rental rate (r) at equilibrium?
ii) Suppose the price of food goes up to 5 (𝑝𝐹 ′ = 5) with the price of cloth being
unchanged. What is the new w/ and r/? Describe the effect of an increase in
(𝑝𝐶 /𝑝𝐹 ) on the relative price of labour (𝑤/𝑟).
iii) What can you say about the purchasing power of labor and land owners after
an increase in the relative price of food? Is your answer consistent with the
Stolper-Samuelson theorem?

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