Question

1.) Draw graphs representing autarky for two countries, China and Japan, producing two goods, automobiles (A) and smart TVs (S), where both countries are using capital (K) and labor (L) to produce both goods with identical technologies. Suppose smart TV production is relatively labor-intensive and autoproduction is relatively capital-intensive, and China has a relative abundance of labor and Japan has a relative abundance of capital. Show the autarkic equilibrium for each country. Specify who has the lower and higher price-ratios for autos relative to smart TVs (PA/PS). 2.Discuss the effects of opening up China and Japan in question 1 to international trade. Specifically, what happens to relative prices of outputs, production and consumption quantities for each country relative to autarky. Who exports what, and why? Who imports what, and why? What happens to the real rental to cpaital and the real wage rate to labor in each country? Why? 3.State the Heckscher-Ohlin theorem. State the Stolper-Samuelson theorem. 4.) What feature of international trade are “imperfect” competition models meant to explain? What is the key feature of “imperfect” competition models? How does this key feature alter the demand curve facing individual firms in markets? 5.What are increasing returns to scale? 6. In words, describe the process by which price-searchers enjoying increasing returns to scale in a closed economy adjusts to long-run no-trade equilibrium. Discuss the effects and process by which firms initially in the long-run no-trade (autarkic) equilibrium adjust to a long-run free-trade equilibrium. What are the major consequences of free-trade for consumers and firms in such a price-searcher, increasing returns market?

Answer 1

1).

So, here there are two countries “Japan” and “China”, where “China” is relatively labor abundant and “Japan” is relatively capital abundant country. Now, there are two goods “S=TV” and “A=automobiles”, where “S” is relatively “L” intensive and “A” is relatively “K” intensive goods, => “China’s” PPF is biased towards “S” and “Japan’s” PPF is biased towards “A”, => the relative supply curve “A” is more for “Japan” compare to “China”.

So, here in the above fig “RSJ” be the relative supply of “A” of “Japan” and “RSC” is the same for china. Now, the downward sloping curve “RD” be the relative demand curve for both the country. So, here “Ej” and “Ec” be the autarkic equilibrium for “Japan” and for “China”. So, the “pj” be the autarkic relative price of “A” of “Japan” and “pc” be the same of China. So, here the relative price of “A” of Japan is lower compare to China.

2).

Now, as the relative price of “A” is differ for both the country, => trade between the two country is possible. So, here the relative price of “A” is lower at “Japan” compare to “China”, => “Japan” has the comparative advantage in the production of “A” and “China” has the comparative advantage in the production of “S”. So, here under the free trade the equilibrium relative price will between autarkic price of two country, where “Japan” will export “Automobile” and “China” will export “TV”.

3).

Now, according to the “Heckscher-Olin” model a country will export a good will use its abundant factor intensively and will import a good which use its scarce factor intensively.

Now, according to the “Stolper-Samuelson theorem” there is direct relationship between the output price ratio and the input price ratio. So, it there are two goods “A” and “S” and two inputs “L” and “K”, where “S” is “L” intensive and “A” is “K” intensive. Now, if “Ps/Pa” the relative price of “S” increases implied “W/R” also increases where “W” be the wage rate and “R” be the rental rate.