Public Affairs 856- Midterm Exam 1

1. Hecksher-Ohlin.

a. Draw the "Johnson Diagram", where cloth is labor intensive and food is land intensive, and home is land abundant, assuming that both countries are initially non-specialized under free trade. Analyze the effect of an increase in the amount of labor in Foreign.

b. Show using PPFs for both home and foreign what happens.

c. Explain which groups benefit in each country from the change indicated in part (a).

2. Consider the following figure from the textbook, which depicts equilibrium in a two country Ricardian world:

a. Graph the foreign country's PPF, the relative price line, and the indifference curve that is relevant for determining consumption (put cloth on the vertical axis, wheat on vertical). Be sure to label each curve, to indicate each of the slopes, intercepts (where you can), and equilibrium levels of consumption, production, and exports and imports.

b. Suppose that the foreign country doubles in size (in terms of labor force). Show what happens to the PPF. Carefully indicate intercepts (where you can) and slope.

c. Show what happens to Figure 2-11 when this occurs. Once again, label the quantities you can (some numerical values cannot be determined).

d. Show what happens to Figure 2-11 when instead the MPLc doubles.