Sample Test 1

Professor Choi, E355 E-1 Name: Last_____________, First _________________

The Ricardian Model

1. (15 points)


          In a Ricardian world, two countries are producing two goods, textiles (T) and cars (C). Labor is the only factor of production being paid. The following table gives the number of man-years it takes to produce a unit of each commodity in two countries, the United States and the United Kingdom.

Labor Requirements

Country cars textiles
U.K. aLC = 40 aLT = 50
U.S. aLC = 30 aLT = 40

  1. Which country has an absolute advantage in the production of textiles?

    Which country has an absolute advantage in the production of cars?

  2. What is the relative price of textiles in each country under autarky?

    US: pT/pC =

    U.K.: pT/pC =

  3. Show which country has a comparative advantage in the production of textiles.

  4. Show which country has a comparative advantage in the production of cars.

  5. Suppose the world prices are as follows:

    p*C = $10, p*T = $13.

    Which country will export textiles?

  6. Find the factoral terms of trade.

The Heckscher-Ohlin Model

2. (15 points)

          There are only two continents, America and Arabia, in a distant planet of an adjacent solar system Utopia. Although they are only 50,000 light years away, trade between Utopians and earthlings are prohibited due to lack of inter-galactic transportation. Trade takes place only between the two continents on Utopia. In each continent there are two castes, laborers and capitalists. Agriculture is capital-intensive in America but labor-intensive in Arabia. On the other hand, manufactures (including oil) are labor-intensive in America and capital-intensive in Arabia. Use diagrams to illustrate your answers if necessary.

  1. Will free trade of outputs insure equalization of factor prices? Explain.

  2. Suppose that America is abundant in capital and Arabia is abundant in labor. Which continent will export agricultural products? What can you say about the pattern of trade between the two continents?

  3. Suppose that Americans were exporting agricultural products to Arabia. After a diplomatic negotiation with Taliban breaks down, President Obama imposes a trade embargo. If the autarky state persists, which caste, capitalists or laborers, in each continent will gain from the embargo?

3. (10 points)

To respond to a labor shortage which is expected to persist until the end of this entury, President Obama signed a new immigration bill which would encourage immigration of Northern Europeans to the U.S. The export sector as a whole is known to use capital intensively.

  1. How does this influx of immigrants affect the employment in the import and export sectors in the U.S.?

  2. If the immigrants have the same tastes as Americans, how will the influx affect our import demand and the export supply?