Question

Determine whether each of the following statements is TRUE or FALSE. Justify all the answers in few sentences.

1. In the Ricardian model with 2 goods (Wine and Cheese) and 2 countries (Home and Foreign) and (except otherwise noted) identical preferences between countries:

(a) If both countries have the same number of workers and Home has absolute advantages in both goods then Home must have a higher wage.

(b) The Home country is never made worse off by productivity growth at Foreign.

(c) Under free trade, if both countries are incompletely specialized then an increase in the number of workers at Home increases the utility of each worker in Foreign.

(d) Suppose that people at Home only eat cheese while people at Foreign only drink wine. Then, if both countries trade in positive quantities, the price of wine in terms of cheese at home must be cheaper under autarky than under trade.

2. Consider a small open economy in the Specific-Factors model with 2 goods (C and F) and three factors (mobile labor, fixed capital in C, and fixed land in F). Except otherwise noted, assume that every factor has the same preferences for C and F. Under free trade, the economy exports F.

(a) As the home country opens up from autarky to trade, the opportunity cost of F in terms of C remains the same.

(b) Suppose landowners only consume cloth. If the amount of capital in C increases, the real income of landowners falls, but the less so if world prices change in response to the capital increase.

(c) When the economy opens to trade, labor loses relative to capital in C.

(d) If the country is large, it is possible to make every agent in the economy better off by imposing a subsidy to the exports of food and some redistribution scheme.

3. In the Heckscher-Ohlin model with 2 goods (C and F), 2 factors (Capital and Labor), and 2 countries (Home and Foreign), where home exports C and C is capital-intensive (and there are no trade costs):

(a) Assuming that there is factor substitution, if there is complete specialization in both countries then the wage must be the same in both countries.

(b) If workers migrate from one country to another and both countries remain incompletely specialized before and after the migration, then factor prices do not change.

(c) It is not possible for a country to be incompletely specialized and have positive exports.

(d) If a tariff is introduced at home, workers in foreign are worse off.

4. Suppose that an import quota leads to the same fall in the foreign price of an imported commodity and the same increase in its domestic price as an import tariff. Then, the importing country is strictly better off under a quota than under a tariff.

5. If an economy exports more than it imports then its intra-industry trade coefficient must be less than 1.

Answer 1