1. Belgium is relatively well-endowed with skilled workers compared...

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1. Belgium is relatively well-endowed with skilled workers compared to China, which is relatively well-endowed with unskilled workers. Assume that the production of pharmaceutical products intensively uses skilled workers while toys intensively use unskilled workers. a. Which country would you expect to have a higher relative wage in skilled labor with no trade? b. Which country has the higher relative price of pharmaceutical products prior to trading? c. Under free trade, which country experiences an increase in the relative wage of skilled workers? Explain 2. Indicate what the Heckscher-Ohlin model predicts about the changes that will occur when a country opens up to international trade. a. Production of its export good will Expand Contract b. Production of its import-competing good will Expand Contract c. Demand for the country’s abundant factor (at initial factor prices) will Increase Decrease d. The price of the scarce factor will Rise Fall e. The price of the abundant factor will Rise Fall Stay the Same Stay the Same Stay the Same Stay the Same Stay the Same 3. According to the Stolper-Samuelson Theorem (circle the correct answers): a. Free trade benefits the [ scarce / abundant ] factor and hurts the [ scarce / abundant ] factor. b. A rise in the price of a good raises the real income of the factor that [ is / is not ] used intensively in its production and lowers the real income of the factor that [ is / is not ] used intensively in its production. 1 of 6 4. Answer each of the questions below in the space provided, with a sentence or less (e.g., “Because...”): a. Why does the presence of imperfect competition create an additional opportunity for a country to gain from trade that would not exist if all markets were perfectly competitive? b. How does the existence of industries with increasing returns to scale create an additional opportunity for the world to gain from trade? 5. Suppose the payoff matrix for two firms are as follows: Produces Does not Produces Produces $20 $140 Foreign Firm Does not Produces $0 Home Firm -$30 $0 $100 $0 $0 a. Will the foreign firm produce the good? Why or why not? Assuming no subsidy, will the home firm produce the good? Why or why not? b. Suppose that a subsidy of $50 is given to the home firm while no subsidy is given to the foreign firm. What is the Nash Equilibrium with this subsidy? (Circle it) Produces Produces $20 $20 $140 Foreign Firm Does not Produces $0 $150 $0 $0 Home Firm Does not Produces c. Is the subsidy to the home firm a benefit to the home country? Explain. $0 2 of 6 6. Figure 1 shows a country’s domestic supply and demand curves for a good, as well as the world price, Pw, for the good that it faces, as a small country, on the world market. Initially, the country is trading freely at that price. Price PW + x PW Supply Figure 1 ab g Q1 Q2 Q3 Q4 Q5 Demand Quantity ____________ ____________ ____________ a. Identify the following quantities using the labels from Figure 1. Quantity domestically produced with free trade Quantity consumed with free trade Quantity imported with free trade h c d i b. Suppose that the government decides to impose a specific tariff of $x on the imports of this good. Identify the following from Figure 1. Quantity imported with the tariff Benefit to the producers (area) Loss to the consumers (area) Government Revenue from the tariff (area) Deadweight loss to the country (area) ____________ ____________ ____________ ____________ ____________ e j f k l 3 of 6 7. Which of the following is an assumption that was introduced by the New Trade Theory and that was not made in previous trade models? ___ a. ___ b. ___ c. ___ d. ___ e. Product differentiation Factor proportions that differ across industries Tariffs Constant returns to scale Differences in unit labor requirements 8. Which of the following is not a possible cause of a country having a comparative advantage in a particular good? ___ a. ___ b. ___ c. ___ d. ___ e. Low demand for the good. Relative abundance of the factor of production used intensively in producing the good. A superior technology for producing the good. An unusually large number of firms producing the good. Relative scarcity of the factor of production that is not used intensively in producing the good. presence of increasing returns to scale in an industry tends to make that industry perfectly competitive. discourage producers from exporting. give a comparative advantage in that industry to large countries. cause price in that industry to rise with output. reduce industry costs the larger the number of firms competing. 10. According to the factor proportions model, countries have comparative advantage in the good that 9. The ___ a. ___ b. ___ c. ___ d. ___ e. ___ a. ___ b. ___ c. ___ d. ___ e. employs a relatively large amount of their scarce factor. employs a relatively large amount of the factor that they have relatively more of than other countries. uses intensively their scarce factor. requires proportionately more of every factor than the goods they import. increases their proportional endowment of their scarce factor. 11. Factor Price Equalization means that, ___ a. ___ b. ___ c. ___ d. all workers are equally productive. if a country fails to trade, its skilled workers will earn no more than its unskilled workers. trade causes the return to human capital to be the same as the return to physical capital. for countries to trade freely, they must tax factors of production so that firms in all countries pay the same factor prices. free trade causes identical factors in different countries to be paid more nearly the same than they were in autarky. ___ e. 12. Which of the following is one of the implications of the New Trade Theory? ___ a. ___ b. ___ c. ___ d. ___ e. Countries as a whole must gain from trade. A country can only hurt itself by using government policies to promote exports. Consumers gain from the increased variety of goods that trade makes available. A country may export a good or import it, but not both. A tariff to protect an industry in a small country hurts demanders more than it helps suppliers. 4 of 6 13. In “The Choice”, the small town of Star and the workers in Ed Johnson’s factory all gained from protecting (only) their industry. a) Explain why they gained. b) Explain why the same gains would not have materialized for the whole country if full protection from international trade was enacted. 5 of 6

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1. b    China will have relatively higher wages for the skilled labor and this is because china is relatively less endowed with skilled labor. In the case of Belgium which is well endowed in skilled labor, it would have lower relative wage for skilled labor.

1. c    Pharmaceuticals which used skilled workers intensively will be costlier in china (higher relative price) and less expensive in Belgium where skilled workers are in abundance...

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