Econ 4401 – International Economics – Spring 2014
Homework #2
Due Date: 3/5/2014, 2:30 PM
NO LATE HOMEWORK IS ACCEPTED
Hand in your printed (and stapled) copy in class
You have to turn in YOUR OWN copy of the assignment
You can discuss your solutions with your classmates, but you MUST acknowledge anyone you
worked with
**********
1) [20 points] Consider two Countries that share the same technology, South Africa and
the UK, and two goods, Diamonds and Tea. There is a Free Trade Agreement in place
between them. The Capital Labor ratio to produce Diamonds (K/LD) equals 3, while
the Capital Labor ratio to produce Tea (K/LT) is 2. Trade between the two countries
is described by the following table (Imports have negative sign, Exports have
positive sign; the numbers reported are already converted in a common
international currency):
South Africa
UK
Diamonds
+100
-100
Tea
-30
+30
Suppose all the assumptions of the Heckscher-Ohlin model hold and answer the
following:
a) Which country do you expect to be relatively Capital Abundant, by looking at
this data? Which country you expect to be relatively Labor Abundant?
b) Suppose the endowment of Capital for South Africa gets bigger. At constant
world prices, what do you expect will happen to South Africa’s production Mix?
c) “Labor unions are likely to oppose the free trade agreement in the UK”: True or
False? Briefly discuss why
d) Suppose data is released on the endowment of Capital and Labor for South
Africa and the UK, as the following Table describes:
South Africa
UK
Capital
(thousands of
machines)
Labor
(thousands of
workers)
1000
3000
500
500
Which country is relatively Capital Abundant? Is this consistent with the HeckscherOhlin Theorem? If not, propose a change to one of the assumptions to rationalize the
observed trade pattern.
2) [20 points] Consider the reading posted for week 6 on the class webpage (“China
hits back at EU wine over solar panel duties”.
a) Suppose China is relatively capital abundant and wine is produced with a labor
intensive technology. What does the H-O model predict?
b) Suppose we have Increasing Returns to Scale in the Production of Solar Panels.
One possible interpretation for this “Trade War” is that both countries in the EU
and China want to become leading exporters of Solar Panels. Comment briefly
on this statement.
c) Suppose we start from a situation in which the EU and China’s K/L happen to be
EXACTLY the same! In the initial situation there’s no trade between them.
Suppose we have a demand shock in China and all of a sudden Chinese
consumers want to consume more wine; demand for Solar Panels in China is
unchanged. Also, demand in the EU is unchanged. What would the H-O model
predict?
d) Consider now the Ricardo’s model of Trade. Suppose China is exporting Solar
Panels and importing Wine and trade is balanced. What happens to trade if
there’s a positive demand shock for Wine in the EU?
3) [10 Points] Calculate the value of the Intraindustry Trade Index for Mexico and
Germany using data from the following table
Mexico
Exports (millions of Mxn
Pesos)
Imports (millions of
Mxn Pesos)
0
200
Furniture
130
750
Primary Metal Industries
20
500
Coal
230
0
Agricultural Crops
700
50
Industry
Automobiles
Germany
Exports (millions of
Euros)
Imports (millions of
Euros)
Automobiles
1000
100
Furniture
350
750
Primary Metal Industries
850
500
Coal
50
300
Agricultural Crops
500
700
Industry