Question

True or False? Explain carefully using theories.

Use diagrams and/or examples when necessary.  

1. Gains to a country from free trade in the neo-classical theory arise due to a higher level of utility and specialization in production.

2. If people in Cuba begin to prefer foreign goods, Cuba’s Terms of Trade will fall.           

3. According to the Stolper-Samuelson Theorem, an increase in the price of a good leads to an increase in the production of that good and a decrease in the production of the other good.

4. The Leontief Paradox states that in 1947, US exported a lower number of labor- intensive goods and imported a greater number of labor-intensive goods.

Answer 1

1) TRUE

Gains to a country from free trade in the neo classical theory arise due to a higher level of utility and specialization in production. Neo Classical theory postulates that free trade is advantageous as it allows nations to specialize in production that requires relatively fewer factor inputs and nations would be able to reach higher utility level  that goes beyond the possibilities that could be reached by producing all required goods in an autarky condition

2) TRUE

Changes in tastes and preferences of the people of a country is one the main factors that influence the term of trade with other country. If people of Cuba begin to prefer foreign goods , demand for foreign goods increase and hence the terms of trade would deteriorate for Cuba

3) TRUE

When there is increase in price of a good in home country , then producers in home country prefer tp produce more of that good and produce less of other goods . This is known as factor price equaliation

4) FALSE

AS we know US is a high ranking of caital labor ratio and thereofe we can accept US to be an exporter of capital intensive goods and importer of labor intensive goods but this was not the case during 25 years after WW II According to Leontief Paradox US export was less capital intensive than their import.