Suppose the World includes two countries H and F, producing two goods 1 & 2, with...

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Suppose the World includes two countries H and F, producing two goods 1 & 2, with the following information: (1). labor endowment: LH = 6, LF = 4 (1). labor requirement for producing 1 unit of good: off = 1, a = 2; af = 1, af = 1 H F 1 1 (3). utility for both countries: u(c₁, C₂) = c² c² Notice that the above variables are given (predetermined). They are information that are available to us to solve for the equilibrium. These variables are called exogenous variables. For our above-mentioned example, they include: technology (the labor productivities), prefer- ence (the utility function), and endowment (in the Ricardian case, it includes only labor). Step 1. Production: Question: Who export What? Step 2. Wage determination: Step 3. Optimal Consumption: Step 4. market clearing condition: Summary of the Equilibrium: Exercise: assume LH = Example 2 12, does the equilibrium of complete specialization exist? (Hint: check H whether the condition = < <= 1 is satisfied?) P1 P2 α2 Example - 3 In example 2, you will find no equilibrium of complete specialization exist. Hence, we should assume country H produce both goods 1 and 2, F produces only goods 2. [Trick: in the case of incomplete specialization, first assume the larger country produces both products.] Try to illustrate this case using the relative demand and relative supply curves. What if population of Home country continues to expand? Example-4 Now go back to example 1, suppose now country H has a technology improvement in both goods 1 & 2, which makes af = 1/2 and a = 1, how will the trade pattern be changed? Who H 2 will export what to whom? by how much? Solve for the new equilibrium. Can you draw any conclusion on consumer's welfare compared with Example 1? Example - 5 Now go back to example 1, suppose now country H has a technology improvement in goods H 2, which makes a 1/2, how will the trade pattern be changed? Who will export what to whom? by how much? Solve for the new equilibrium. Can you draw any conclusion on consumer's welfare compared with Example 1? = Suppose the World includes two countries H and F, producing two goods 1 & 2, with the following information: (1). labor endowment: LH = 6, LF = 4 (1). labor requirement for producing 1 unit of good: off = 1, a = 2; af = 1, af = 1 H F 1 1 (3). utility for both countries: u(c₁, C₂) = c² c² Notice that the above variables are given (predetermined). They are information that are available to us to solve for the equilibrium. These variables are called exogenous variables. For our above-mentioned example, they include: technology (the labor productivities), prefer- ence (the utility function), and endowment (in the Ricardian case, it includes only labor). Step 1. Production: Question: Who export What? Step 2. Wage determination: Step 3. Optimal Consumption: Step 4. market clearing condition: Summary of the Equilibrium: Exercise: assume LH = Example 2 12, does the equilibrium of complete specialization exist? (Hint: check H whether the condition = < <= 1 is satisfied?) P1 P2 α2 Example - 3 In example 2, you will find no equilibrium of complete specialization exist. Hence, we should assume country H produce both goods 1 and 2, F produces only goods 2. [Trick: in the case of incomplete specialization, first assume the larger country produces both products.] Try to illustrate this case using the relative demand and relative supply curves. What if population of Home country continues to expand? Example-4 Now go back to example 1, suppose now country H has a technology improvement in both goods 1 & 2, which makes af = 1/2 and a = 1, how will the trade pattern be changed? Who H 2 will export what to whom? by how much? Solve for the new equilibrium. Can you draw any conclusion on consumer's welfare compared with Example 1? Example - 5 Now go back to example 1, suppose now country H has a technology improvement in goods H 2, which makes a 1/2, how will the trade pattern be changed? Who will export what to whom? by how much? Solve for the new equilibrium. Can you draw any conclusion on consumer's welfare compared with Example 1? =

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To determine the trade patterns and equilibrium in each example we need to follow the steps outlined in the question Lets go through each example one by one Example 1 Step 1 Production Country H has a ... View the full answer