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Economics Problem Set Analysis

This document contains an economics problem set involving the Heckscher-Ohlin (H-O) model of international trade. It presents a scenario where France and Germany have different factor endowments but identical technologies for producing mobile phones and champagne. Students are asked to: [1] Identify the labor and capital intensive industries and which country has a comparative advantage; [2] Calculate autarky equilibrium allocations and prices; [3] Determine the pattern of trade and new equilibrium under free trade; [4] Assess whether countries are better off with trade; and [5] Identify which country benefits more from trade.

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211 views5 pages

Economics Problem Set Analysis

This document contains an economics problem set involving the Heckscher-Ohlin (H-O) model of international trade. It presents a scenario where France and Germany have different factor endowments but identical technologies for producing mobile phones and champagne. Students are asked to: [1] Identify the labor and capital intensive industries and which country has a comparative advantage; [2] Calculate autarky equilibrium allocations and prices; [3] Determine the pattern of trade and new equilibrium under free trade; [4] Assess whether countries are better off with trade; and [5] Identify which country benefits more from trade.

Uploaded by

thomas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Thomas Alejandro Manzano Pérez

International Economics
UC3M
Problem Set 5

INSTRUCTIONS: For the following session, you should solve only the following exercise. Next week,
a THIRD part of the H-O Model will be uploaded.

1. Thanks to proximity and industrial cooperation, France and Germany share the same technology
for the production of mobile phones and champagne. These two european countries only differ in
their respective factor endowments, where KF = 70 and LF = 110 while KG = 110 and LG =
70.
Both countries have the same utility function, which is represented by U
(C 1/2 1/2
m , Cc ) = Cm Cc
where Cm represents the consumption of mobile phones and Cc represents the consumption of
champagne. The production functions are: Qm = min { 2Lm, Km } and Qc = min {Lc, 2Kc where
m represents the production of mobile phones. }

(a) i) Which industry is labor intensive and which is capital intensive? ii) Which country has a
relative abundance in the capital intensive good? iii) Using the H-O Model, which is the pattern of
trade that you predict if both economies start trading?

(b) Find the close economy equilibrium allocation of capital and labor, and the equilibrium
quantities.
(c) Find the autarchy equilibrium relative prices, and prove that at those prices the economy is
at equilibrium.
(d) Find the equilibrium relative prices if both countries engaged in free trade. Notice that for
this question you must find the equilibrium relative PRICE. To find it you have to make
exports equal to imports and solve por Pm/Pc (not be surprisingly you will find that at
equilibrium Pm/Pc = 1). Find the equilibrium quantities (in production and consumption)
and describe the pattern of trade.

(e) Do both countries are better off under free trade?


(f) Are this results consistent with the H-O Model?

(g) For this economy (Germany vs France), who is better off and who is worst off under inter-
national Trade? Explain this interesting result.
1

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