ECON 448: Week 3-

1. Heckscher-Ohline Model and Stolper-Samuelson Theorem -

Understand why the Heckscher-Ohlin model does not lead to complete specialization, in contrast to the Ricardian framework. Take the car-textiles example studied in this chapter. Recall that in our example, each of these goods is produced by capital and labor, but cars use capital more intensively. Now an increase in the relative price of cars will cause more resources to go into car production.

(a) Show that this flow of resources will cause the ratio of capital to wage income to rise.

(b) Which industry will be more adversely affected by the change in part (a)?

(c) Now combine the observations in parts (a) and (B) to show that textile production will still be profitable, though the total production of textiles will decline. Supplement your understanding by drawing production possibility frontiers, relative price lines, and the corresponding production points.

2. Comparison between Trade Theories-

1. While the traditional view of trade based on comparative advantage predicts inter industry trade between different countries, the new trade theory based on demand for varieties and economies of scale predicts intra-industry trade between similar countries.

2. While the traditional view of trade predicts conflicts of interests over trade policy within each country, the new trade theory predicts no such conflict of interests.

3. Price Elasticity of Demand-

1. The percentage change in quantity demanded in response to a one percent change in price, ceteris parabus.

∈ = % change in quantity/% change in price = -(dQ/dP)/(Q/P) = - (dQ/Q)/(dP/P) = -(dlnQ/dlnP)

2. Derive the condition that total revenue (=price × quantity) decreases when price decreases. Is it possible for total revenue to increase when price decreases?

3. The (price) elasticity of Gasoline is less than one while that of Car is greater than one. In other words, Gasoline is inelastic while car is elastic. When Gas and Car prices drop the same percent, say 5%, which industry is more adversely affected?

4. Industrial Revolution

1. The Industrial Revolution (roughly 1760-1850) was a turning point in world history, for it inaugurated the era of sustained economic growth, and technological change was the motor of the Industrial Revolution.

2. According to Allen, what explains why the Industrial Revolution occurred in Britain first, and then subsequently other Western European countries?