Question. Heckscher-Ohlin Model
Consider the following data in a Heckscher-Ohlin model with two goods (milk and cookies) and two factors (capital and labor). (No substitution between labor and capital) aKC = 5 hours per pound (unit capital requirement in cookies) aKW = 10 hours per gallon (unit capital requirement in milk) aLC = 15 hours per pound (unit labor requirement in cookies) aLW = 20 hours per gallon (unit labor requirement in milk)
L = 5,500 hours (labor endowment)
K = 2,500 hours (capital endowment)
a. Show graphically a production possibilities frontier.
b. Solve for the equilibrium output levels of milk and cookies. (Hint: Use the labor and capital constraints, which are two equations of two unknowns, output of milk and cookies).
Suppose the labor endowment falls by 100 hours to 5,400 hours.
c. Show graphically a new production possibilities frontier.
d. Solve for the new equilibrium output levels of milk and cookies.
e. Calculate the percentage changes in the endowments.
f. Calculate the percentage changes in the outputs.
g. Identify which good is labor intensive. Explain.
h. Identify which is capital intensive. Explain.
The level of consumption and production for good X and Y of Country A is shown below
|
Good
|
Production
|
Consumption
|
|
X
|
1000
|
800
|
|
Y
|
1000
|
1500
|
a. Country A will export? Import? Find the amount of export and import
b. How country A's terms of trade will be affected if there a sudden decrease in the supply of Y in the world?
c. How country A's terms of trade will be affected if another country (suppose country b) starts producing and exporting good X in the world market.
d. If the government of country A gives export subsidies to its exporters, what will happen to terms of trade?'
e. Suppose price of x is 15 and price of Y is 30. Now the government imposes tariff on imported goods (tariff is 20%). What will happen to internal/domestic price and external price?
f. What will happen to relative demand and relative supply of X?
g. Show the change with a graph.