International Trade: HW1

Spring 2018, Xiamen University

Instructor: Kai Li
Due on March 30, 2018

March 25, 2018

Problem 1: Ricardian Model

What determines the pattern of international trade between two countries in the Ricardian
Model?

Problem 2: Ricardian Model

China U.S
pounds of beef produced per worker 17 35
bushels of wheat produced per hour 51 105

Q1: Which country has the absolute advantage in the production of wheat?
Q2: Using Ricardian Model, would trade between China and U.S be mutually benefi-
cial? Briefly explain.
Q3: Will the answers be different if a worker in the U.S becomes more productive and
could produce 70 pounds of beef or 140 bushels of wheat per hour?

Problem 3: Specific Factor Model

Use the following information to answer the questions below: Computers: Sales revenue
= Pc ∗ Qc =150; Payments to labor = W ∗ Lc =75; Payments to capital = Rk ∗ K =75;
Barley: Sales revenue = PB ∗ QB =150; Payments to labor = W ∗ LB =70; Payments
to land = RT ∗ T =80;

1
 Holding the price of computers constant, suppose the percentage increase in the price
of barley is 10% and the percentage increase in wage is 5%.
Q1: Determine the impact of the increase in the price of barley on the rentals on land.
Q2: Determine the impact of the increase in the price of barley on the rentals on
capital.
Q3: Determine the impact of the increase in the price of barley on the welfare of labor.
Q4: Summerize your finding in the notational format (rather than numerical number).

Problem 4: HO Model
What is the paradoxical about the results of Leontief’s test of the H-O model?

Problem 5: HO Model
Suppose Indonesia and Canada trade in sarongs adn beer. Use the following data for
Canada to answer the questions:
Sarongs: Sales revenue = PS ∗ QS =120; Payments to labor = W ∗ LS =80; Payments
to capital = R ∗ KS =40; Percentage increase in the price = 4P PS
S
= 25%
Beer: Sales revenue = PB ∗ QB =120; Payments to labor = W ∗ LB =40; Payments
to capital = R ∗ KB =80; Percentage increase in the price = 4P PB
B
= 0%
Q1: Which industry is labor intensive?
Q2: Give the percentage change in the rental on capital.
Q3: Compare the magnitude of the percentage in the rental on capital in part (b)
with that of labor.
Q4: Identify the factor that benefits from trade in real returns. Which factor loses?

Problem 6: HO Model
Consider a long-run model for a country producing two products (digital cameras and
baskets) using two factors (capital and labor).
Q1: Which good would you expect to be capital intensive? Which good would you
expect to be labor-intensive? Why?
Q2: Suppose that foreign owners of domestic capital decide to decrease their invest-
ment. Illustrate the effects of this change in a box diagram. Does output in each industry
increase, decrease or stay the same?