Winter 2016 Econ 231, Assignment Introduction to International economics (10% of Final Grade) Due: Friday, March 25 th , before end of class NOTE:  Late Assignments will be penalized at 10 points per day. Assignments more than 5 days late will not be accepted Answer all 8 questions and show all working as marks will be allotted for every stage of your solution. Marks will also be allotted for correct labeling, so remember to label the axes as well as the curves you draw. Use graphs whenever possible to properly elaborate your explanations Question 1 (15 Points) 1. Home and Foreign produce cheese and wine with the following unit labor requirement: Home Foreign Cheese 5  6 Wine  2  6 Home and Foreign have total labor forces of L = 100 and L = 200 workers respectively. (a) Graph each country’s PPF and calculate the opportunity cost of cheese in terms of wine. Which country has an absolute advantage in cheese production, which in wine production? Which country has a comparative advantage in cheese production, which in wine production? (b) Using the graph from your preceding answer, draw each country’s consumption possibilities in the absence of trade. Show on the graph the relative prices of cheese in terms of wine in autarky. (c) Both countries open up to free trade. Graph the relative world supply of cheese to wine and its response to the relative world price of cheese P c /P w base on the unit labor requirements. Provide specific values on the axes. Question 2 (15 Points) 2. We are given the following labor input requirements for Uruguay and Chile: Uruguay  Chile Insulation  5  2.5 Grain  15  30 Beef  30  30 Video Tape  2  3 Please provide a detailed justification for all your answers to the following questions. (a) What is the order of products from greatest to least comparative advantage for Uruguay relative to Chile? (b) Use the numbers provided to draw the relative demand for labor. The y-axis of the diagram should display the relative wage of Uruguay to Chile (w u /w c ) (c) In equilibrium both Uruguay and Chile produce Video Tapes. What other products are produced by Uruguay, and what other products are produced by Chile? (d) What is the relative wage (w u /w c ) for Uruguay to Chile when the equilibrium results in both countries producing Video Tapes? Question 3 (10 Points) 3. Two countries Canada and Mexico produce two goods, timber and televisions. Assume that land is specific to timber, capital is specific to televisions, and labor is free to move between the two industries. When Canada and Mexico engage in free trade, the relative price of televisions falls in Canada and the relative price of timber falls in Mexico. (a) Show graphically how the wage changes in Canada because of a fall in the price of televisions, holding constant the price of timber. (b) What is the impact of opening trade on capital rentals and land in Canada? (c) What is the impact of opening trade on capital rentals and land in Mexico? (d) In each country, has the specific factor in the export industry gained or lost, and has the specific factor in the import industry gained or lost? Question 4 (5 Points) 4. According to the Heckscher-Ohlin model, two countries can equalize wage differences by either engaging in international trade in goods or allowing skilled and unskilled labor to freely move between the two countries. Comment. Question 5 (5 Points) 5. In 2015, the Ukraine successfully negotiated terms to become a member of the World Trade Organization. Consequently, countries such as those in Western Europe are shifting toward free trade with the Ukraine. What does the Stolper-Samuelson theorem predict about the impact of the shift on the real wage of unskilled labor in Western Europe? In the Ukraine? Question 6 (10 Points) 6. Countries A and B have two factors of production, capital and labor, with which they produce two goods, X and Y. Technology is the same in the two countries. X is Capital-intensive; A is capital-abundant. Analyze the effects on the terms of trade and on the two countries’ welfare of the following: a) An increase in A’s capital stock. b) An increase in A’s labor supply. c) An increase in B’s capital stock. d) An increase in B’s labor supply. Question 7 (5 Points) 7. Recently, a growing labor shortage has been causing Chinese wages to rise. If this trend continues, what will you expect to see happen to external economies industries currently dominated by China? How would change take place? Question 8 (5 Points) 8. If there are internal economies of scale, why would it ever make sense for a firm to produce the same good in more than one production facility?