E238PS 5-S-20 - Problem Set 5 Spring 2020 PDF

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Problem Set 5 Spring 2020
Marc Lieberman...

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Economics 238 Marc Lieberman

New York University Spring 2020 Problem Set #5 Resource Markets in the Heckscher-Ohlin Model

General Instructions: This is the second of two problem sets on the H-O model. Selected answers from this problem set are due online (at our NYU Classes site) on Wednesday, March 4 at 11:30am. So here’s what you need to do before the deadline: • • •

Answer all of the questions on this problem set, and keep track of your answers. Draw all requested graphs neatly. When you’ve finished, go to our NYU Classes site and follow the same instructions as on Problem Set #1 (see that problem set for details).

Note that for this problem set, you’ll be able to answer some of the selected questions directly from your graphs, but others will require some thought. So leave enough time for thinking! Note on recitations: At the recitations on Friday, Feb 28, the TAs will show you how to solve problems similar to these. You can attend either recitation time, or neither (if you’re confident you can do the entire problem set on your own).

In the H-O model, there are multiple resources. In our classroom model, we made the simplifying assumption that there are only two resources -- high skilled labor and less skilled labor. In this problem set, we’ll use a different set of resources: “labor” and “land”. You’ll have to think about how the logic applies to this case. Assume: • Two countries: Australia and India • Two goods: Wheat and Textiles • Two resources: Labor and Land • Wheat makes relatively intensive use of Land • Australia is relatively abundant in Land • Australia and India are initially in autarky, and then begin trading. 1. On a single page, sketch PPFs and CPFs for both countries (with wheat on the vertical axis for consistency with the answer sheet you’ll be getting). Note that there will be no numbers in this problem set. but put generic labels on each graph for each of the following features: a. b. c. d. e. f.

pre-trade production point (“A”) post trade production point (“B”) post-trade relative price of textiles (use an arrow pointing to a feature on your PPF-CPF graphs that represents this) post-trade consumption point (“C”) exports or imports of textiles (label it on the “trade triangle” for each country) exports or imports of wheat (label it on the “trade triangle” for each country)

2. On a second, single page, sketch four graphs, one for each of the four resource markets in India (i.e., markets for land and labor in both the wheat industry and the textile industry). Make sure all 4 graphs for this question are on one page. Note: For consistency with the posted answer sheet, position India’s market for labor in wheat in the upper left corner, land in wheat in the lower left, labor in textiles in upper right, and land in textiles in lower right)

In each graph, label the vertical axes with a resource price – wage (W) or rent (R) – and label the horizontal axes with number of workers or acres of land, as called for in each graph. Also include (non-numeric) labels on this graph for each of the following features. [You’ll be asked questions about the features in the “Selected Questions” you’ll be answering online.]

a. b. c.

Initial autarky equilibrium point in each resource market (A) Initial autarky price for labor in each industry (W1) Initial autarky price (rent) for land in each industry (R1) Hint: If you are wondering which resource starts out earning more income for its owners in this problem– land or labor– the answer in the real world is: probably land. But that doesn’t necessarily mean that R1 > W1, because the

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“wage rate” and “rental rate” depend on the units of measurement chosen for land and labor (e.g. wage per hour or wage per week? weekly rent per acre or monthly rent per square mile?) For this analysis, neither the units of measurement nor the relative size of R1 & W1 matter. All that matters are the changes to “R” and “W” as trade opens.

d. e. f. g. h. i. j. k.

Short-run, post-trade equilibrium point in each resource market (A’) Short-run, post-trade wage for labor in wheat (W2) Short-run, post-trade wage for labor in textiles (W3) Short-run, post-trade rent for land in wheat (R2) Short-run, post-trade rent for land in textiles (R3) Long-run, post-trade equilibrium point in each resource market (B) Long-run post-trade wage for labor in each industry (W4) Long-run post-trade rent for land in each industry (R4)

For the following two questions, fill in the blanks. (In the online questions, these will be multiple choice, but see if you can fill them in here before looking at the answer choices there.) Hint: Keep in mind that it’s always the owner of any resource that experiences the benefit or harm from international trade, based on the price they will receive from making their resource available for production. In our classroom model. HSL was “owned” by the workers who possess the high skills; and they earn the high-skilled wage. LSL was “owned” by the workers who are less skilled, and they earn the less-skilled wage. In this problem, land is owned by “landowners,” and they earn rent. “Labor” is owned by “workers” and they earn a wage. Finally, note that we are not disaggregating Labor into HSL and LSL in this example, but rather lumping all labor together into one category. We’re doing this because we already have a second resource – Land – and we always deal with just two resources in our classroom H-O model to keep it simple. As you fill in the blanks, think about both resources and industries. (In some of the blanks, you’ll have to identify a resource owner and an industry; in others, just a resource owner.)

3. In India: In the short run, we would expect _______________________________ to be harmed and ________________________ to gain. In the long run,,we would expect ___________________________ to be harmed and ________________________to gain. To fill in the next set of blanks: Note that a similar set of 4-diagrams exists for the resource markets in Australia. You can sketch these diagrams for Australia on your own (not to be turned in), or just use symmetrical logic and the results for India to infer what happens in Australia. But for extra practice, I’d recommend sketching the diagrams for Australia on your own.

4. In Australia: In the short run, we would expect _______________________________ to be harmed and ________________________ to gain. In the long run,, we would expect ___________________________ to be harmed and ________________________to gain.

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