Question

In: Economics

Consider the trade between Germany and the Dominican Republic. Germany is a capital-abundant country and the...

Consider the trade between Germany and the Dominican Republic. Germany is a capital-abundant country and the DR is a labor-abundant country. There are two goods: a capital-intensive good, chemicals, and a labor-intensive good, clothing. (Note: DR stands for Dominican Republic)

Answer the following 4 questions according to the above information.

1. Using Heckscher-Ohlin (H-O) Theory, what should be the trade pattern?

A. Germany exports clothing and imports chemicals while DR exports chemicals and imports clothing.

B. Germany exports chemicals and imports clothing while DR exports clothing and imports chemicals.

C. Germany exports chemicals and imports clothing while DR exports chemicals and imports clothing.

D. Germany exports clothing and imports chemicals while DR exports clothing and imports chemicals.

2. In the short run, which of the following is true about the wage rates?

A. Wage rate in chemicals industry will rise in Germany.

B. Wage rate in clothing industry will rise in Germany.

C. Wage rate in chemicals industry will rise in DR.

D. Wage rate in clothing industry will decline in DR.

3. Using Stolper-Samuelson Theorem, which of the following would be correct?

A. Wage rate will decrease in DR

B. Wage rate will increase in Germany

C. Rental rates will increase in DR

D. Rental rates will increase in Germany

4. Which of the following would be false in the long run?

A. Wage rate in Germany will be equal to wage rate in DR

B. Rental rates in Germany will be equal to rental rates in DR

C. Domestic price of chemicals in Germany will be less than the domestic price of chemicals in DR.

D. Domestic price of chemicals in Germany will be equal to the domestic price of chemicals in DR.

Expert Solution

1.B) According to H-O theory, a country should produce good in which they have a comparative advantage and Germany has a comparative advantage in producing chemicals and DR has a comparative advantage in producing cloths.therefore, Germany exports chemicals and imports clothing while DR exports clothing and imports chemicals.
2.A) Germany is a capital abundant country, there will be very less number of the worker working. so the wage rate in chemicals industry will rise in Germany.
3.D) A rise in the relative price of good leads to rising in that factor which is used most intensively in the production and fall in other factor. if rise in the production of chemical leads to rise in rental rate in germany. So, Rental rates will increase in Germany.
4.D) with trade, the price of good should be equal in noth the countries. So, Domestic price of chemicals in Germany will be equal to the domestic price of chemicals in DR.

Rahul Sunny answered 2 years ago

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