Inter Trade Mid Review

2018年10月26日 16:06

1: Mytown and Youtown have just openned their border to free trade. Mytown is
exporting Laptops (L), while Youtown exports Food (F), then it be the case that the
labor requirement MUST satisfy (where ai,c represents the labor requirements in
country c in order to produce one unit of good i.)
a) Am,l ＞ Ay,l
b) Am,l ＜ Ay,l
c) Am,f ＞ Ay,f
d) Am,l / Ay,l ＜ Am,f / Ay,f

Instructions: The following country data is for questions 2 to 5. Consider two

countries, Nothon and Southon. Two goods are produced: mobile phones and champagne.
In Nothon the unit labor requirements for mobile phones and champagne is the same: 5
units for phone and 5 units for champagne. In Southon the unit labor requirements for
mobile phones and champagne are 10 units and 15 units respectively. The Nothon has a
labor force of 100 units while Southon has a labor force equal to 150 units.

2: From the provided data we can deduct that:

a) Nothon has an absolute advantage in the production of champagne and a
comparative disadvantage in the production champagne.
b) Nothon has an absolute advantage in the production of mobile phones and a
comparative advantage in champagne
c) Southon will benefit from free trade if they specialize in the production of mobile
phones and Nothon specializes in champagne
d) Southon has a comparative advantage in champagne and an absolute advantage in
both goods

3: Nothon and Southon engage in free trade. If the world relative price of champagne
is Pc/PM=2 then it must be the case that:
a) Nothon specializes in champagne and Southon in mobile phones
b) The world relative supply QM/QC is equal to zero
c) Both countries specialize in mobile phones
d) None of the other

4: Assume that both countries have the same utility function U(CM, CC) = CM^(1/2)
CC^(1/2), where CM represents the quantity consumed of mobile phones, and CC the
consumption of champagne. With this information, it must be the case that at
equilibrium:
a) Both countries benefit from free trade
b) Only Nothon benefits from free trade
c) No country benefits from trade
d) Only Southon benefits from trade

5: We also know that at equilibrium

a) Wages are same in Nothon and Southon

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 a) Wages are same in Nothon and Southon
b) Salaries are higher in Nothon
c) Salaries are higher in Southon
d) That WS/WN = 2

Instrutions: the following information corresponds to question 6 to 10. Because of some

Russian leaks, technology is avaialable for everybody and now Weston and Eston share
the SAME technology, and they only differ in their labor (L) and capital (K)
endowments, where KW = 80, and LW=100 while KE = 100 and LE = 80. Assume that mobile
phones are capital intensive, while champagne is labor intensive.

6: If both countries engage in free trade, it must be the case that

a) Owners of capital in Weston will be very unhappy
b) Eston will export mobile phones to Weston
c) The relative price of champagne will increase in Weston
d) All of the other

7: Consistent with Rybczynki theorm, we know that, given the relative prices of goods,
a) If the endowment of capital increases in Eston then the production of champagne
and mobile phone increases in Eston
b) If the endowment of capital decreases in Eston then the production of champagne
increases and the production of mobile phone decreases in Eston
c) If the endowment of labor decreases in Eston then the production of champagne
increases and the production of mobile phones decreases in Eston
d) None of the other

8: If Stolper Samuelson holds for this economy it must be the case that:
a) An increase in the price of mobile phones will generate an increase in the wage in
Weston
b) A drop in the price of champagne will increase wages in both economies
c) A drop in the price of mobile phones will generate an increase in the wages in
Eston
d) None of the other

9: If both countries engage in free trade, and the relative factor endowments lay
within the diversification cone, then at equilibrium:
a) Wages will be the same in Eston and Wage (WW=WE)
b) The return of capital will be higher in W (RW>RE)
c) Relative returns equate (RW/WW=RE/WE)
d) Because Eston has more capital, the relative return of capital will be higher in
Eston (RW/WW<RE/WE)

10: Weston and Eston techonologies are represented by a Cobb-Douglas production

function. If the relative price of champagne increases, then
a) Relative wages W/R will increase and the relative use of capital K/L increases
b) Relative wages W/R will increase and the relative use of capital K/L decreases
c) Relative wages W/R will decrease and the relative use of capital K/L increases
d) Relative wages W/R will decrease and the relative use of capital K/L decreases

11: Weston and Eston produce one good and share the same techonology, when marginal
productivity of labor decreases when more workers are hired. Weston and Eston have

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productivity of labor decreases when more workers are hired. Weston and Eston have
the same amount of capital, but they a different amount of workers, where W has more
workers available than E. If there is labor mobility b/w E and W it must be the case
that:
a) Workers will migrate from E to W
b) Salaries will increase in W
c) The income of land owners will drop in W
d) The income of land owners will drop in E

12: Consider the same data than the previous question. If there is labor mobility b/w E
and W, who will be better off?
a) Migrant workers from E to W
b) Migrant workers from W to E
c) Original resident workers from E
d) None of the other

13: Germania and Hispania are two kingdoms with identical technologies which can only
produce two goods: wine and cheese. Being bigger than Hispania, Germania has 2000
workers and 1000 acres of land, while Hispania only has 500 workers and 100 acres of
land. Wine is land intensive and cheese is labor intensive. According to this information,
if these two kingdoms engage in free trade:
a) The relative price of cheese will decrease in Hispania
b) Germania will export cheese and land owner in Hispania will be better off thanks
to free trade
c) Hispania will export cheese and workers in Germania will be worse off because of
free trade
d) Germania will export wine and land owners in Hispania will be better off thanks to
free trade

14: Consider the same data than previous question, but instead, capital represents
skilled workers and labor represents unskilled workers. If both Germania and Hispania
have free trade then it must be the case that:
a) Income inequality increases in Germania
b) Income inequality increases in Hispania
c) Income inequality stays the same
d) Income inequality frops in Germania

Exercise in Labor Mobility:

Nothon and Southon produce only one good and share the same Cobb-Douglas
technology, where Q=K^(1/2)L^(1/2). The only difference are in their labor and capital
endowments, where KN = KS = 4 and there labor endowments are LN = 4 in N and LS = 14
in S.
a) Find the AUTARCHY i)equilibrium wages ii)GDP iii)income from workers and capital
owners from N
b) The economy has opened to labor mobility. Calculate: i)equilibrium wage ii)the
number of workers migrating to (or from) N iii)the income from workers (only
nationals) and the income from capital owners at N
c) Prove that with the appropriate transfer payments, capital and labor owners in N
will support labor mobility

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