Question

	No trade	Trade
Daily production of fish	1000 kg	1500 kg
Daily consumption of fish	1000 kg	1000 kg
capital used to produce fish	$100,000	$175,000
labor used to produce fish	10,000 hours	12,500 hours
daily production of chemicals	1250 L	750 L
daily consumption of chemicals	1250 L	2000 L
capital used to produce chemicals	$200,000	$125,000
labor used to produce chemicals	5000 hours	2500 hours

(f) When Home opens to free trade, which factor(s) experience an increase in its real return? Explain.

(g) When Home opens to free trade, will the marginal product of capital (MPK) in the Chemicals sector increase, decrease or remain constant. Explain.

(h) When Home opens to free trade, how and why does the labor-to-capital ratio in the Fish sector change? Explain.

(i) An economist argues that when the Home country moves from the no-trade equilibrium to the free-trade equilibrium, it enjoys “gains from trade.” Where are those gains in this data?  

Answer 1

Answer:

Given

there are two goods these are “fish” and “Chemicals”.

We can see that here the home country is exporting “fish” and importing “Chemicals”,

(f) When Home opens to free trade, factor(s) that experience an increase in its real return are:

=> the return of the factor use by “fish” sector intensively will increase,

=> the return of the abundant factor will increase.

So, here “labor capital” ratio of fish industry before trade is “10,000/100,000 = 0.01”,

and the same for “Chemical” sector is “5,000/200,000 = 0.025 > 0.01.

So, here “fish” sector having lower “labor capital” ratio,

=> the real return of “capital” will increase because here the country is exporting fish and “capital” is intensive factor here.

(g) When Home opens to free trade, whether the marginal product of capital (MPK) in the Chemicals sector increase, decrease or remain constant.is:

As we know that here the technology is variable coefficient type,

=> there is diminishing marginal productivity,

=> as the production increases,

=> the marginal productivity decreases.

So, here under free trade the production of “Chemical” decreases,

=> the marginal productivity increases,

=> here the “MPK” increases under free trade situation compared to the autarkic.

(h) When Home opens to free trade, does the labor-to-capital ratio in the Fish sector change as follows:

As we know that here the technology is variable coefficient type for both goods,

=> the optimum input usage depend on the input price ratio,

=> as the input price changes,

=> the input price ratio changes,

=> optimum input use also changes.

So, here under free trade case the relative price will change

=> the input price ratio will also change,

=> input usage will also change.

So, that‘s why the “labor capital ratio” changes in “fish” as well as in “Chemical” sector.

(i) when the Home country moves from the no-trade equilibrium to the free-trade equilibrium, it enjoys “gains from trade.” gains in this data are:

So, here in the data we can see that the consumption of “fish” is same in post trade and autarkic situation, but the consumption of “Chemical” increases,

=> the increase in the consumption of “Chemical” can be consider as gain from trade.