(2.) This is a computational question on the Classical model of trade. Its primary purpose is...

 

 

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(2.) This is a computational question on the Classical model of trade. Its primary purpose is to solidify concepts, clarify absolute advantage and comparative advantage, and demonstrate the individual welfare effects of trade. The economy has two countries, home (H) and foreign (F); two goods, wheat (W) and cloth (C); and one factor of production, labour (L). Adopt the assumptions and the notation of this model that we have used in class. The production functions in each country for each good are as follows: Q = 10L Home: Foreign: Q = 2L QF=8LF. QE = 6LE. There are two households in each country, Household 1 and 2. In Country H, Household 1 has 40 units of labour and Household 2 has 80 units of labour (so LH 120). In Country F, Household 1 has 150 units of labour and Household 2 has 100 units of labour (so LF = 250). Household k in each country has the following Cobb-Douglas utility function: U(d, dk) = (d)sk (dk)1-8k. = The Marshallian demand functions associated this utility function are as follows: (T) Pw dw (pw, pc, Ik) = k dc (pw, pc, Ik) = (1 - 3k) (). Let 3¹ 1.0 and 32 = 0.2 in each country. = The open economy equilibrium between H and F is characterized by each country specializing in pro- duction of only one of the goods. (2.A.) (25 Points) By calculating equilibrium variables in the closed economy and the open economy, complete Table 1. Table 1: Price ratios, real factor prices, quantities, and utilities Closed Economy Variable (PW) j Pc (_~__) ³ pw (0)³ pc Qw Qºc Dw D'C Xw X Household 1 Utility in j Household 2 Utility in j (Autarky) Country H Country F Open Economy (Trade) Country H Country F (2.B.) (10 points) Demonstrate that the pattern of real wage differences between the two countries in both autarky and trade is consistent with the pattern of absolute advantage. Demonstrate that the pattern of trade is consistent with the pattern of comparative advantage. (2.C.) (10 points) Your results in Table 1 should show that no consumers lose from trade but not all consumers gain from trade in this economy. Provide economic intuition for why one consumer does not gain from trade. (2.) This is a computational question on the Classical model of trade. Its primary purpose is to solidify concepts, clarify absolute advantage and comparative advantage, and demonstrate the individual welfare effects of trade. The economy has two countries, home (H) and foreign (F); two goods, wheat (W) and cloth (C); and one factor of production, labour (L). Adopt the assumptions and the notation of this model that we have used in class. The production functions in each country for each good are as follows: Q = 10L Home: Foreign: Q = 2L QF=8LF. QE = 6LE. There are two households in each country, Household 1 and 2. In Country H, Household 1 has 40 units of labour and Household 2 has 80 units of labour (so LH 120). In Country F, Household 1 has 150 units of labour and Household 2 has 100 units of labour (so LF = 250). Household k in each country has the following Cobb-Douglas utility function: U(d, dk) = (d)sk (dk)1-8k. = The Marshallian demand functions associated this utility function are as follows: (T) Pw dw (pw, pc, Ik) = k dc (pw, pc, Ik) = (1 - 3k) (). Let 3¹ 1.0 and 32 = 0.2 in each country. = The open economy equilibrium between H and F is characterized by each country specializing in pro- duction of only one of the goods. (2.A.) (25 Points) By calculating equilibrium variables in the closed economy and the open economy, complete Table 1. Table 1: Price ratios, real factor prices, quantities, and utilities Closed Economy Variable (PW) j Pc (_~__) ³ pw (0)³ pc Qw Qºc Dw D'C Xw X Household 1 Utility in j Household 2 Utility in j (Autarky) Country H Country F Open Economy (Trade) Country H Country F (2.B.) (10 points) Demonstrate that the pattern of real wage differences between the two countries in both autarky and trade is consistent with the pattern of absolute advantage. Demonstrate that the pattern of trade is consistent with the pattern of comparative advantage. (2.C.) (10 points) Your results in Table 1 should show that no consumers lose from trade but not all consumers gain from trade in this economy. Provide economic intuition for why one consumer does not gain from trade.

Answer rating: 100% (QA)

a To calculate the equilibrium variables in the closed economy we need to find the autarky prices and quantities for each country Since each household in each country has the same utility function we ... View the full answer