Consider a 2x2x2 Heckscher-Ohlin model with two countries: Greece and Italy; two goods: olives and cheese;...

Transcribed Image Text:

Consider a 2x2x2 Heckscher-Ohlin model with two countries: Greece and Italy; two goods: olives and cheese; two inputs: labour and capital. Suppose that Greece is capital abundant, and you are given the following information about production and consumption in Greece: Greece Autarky Olive production 500 kilograms Olive consumption 500 kilograms 500 kilograms Cheese production Cheese consumption 500 kilograms Free Trade 400 kilograms 700 kilograms 800 kilograms 400 kilograms a. (8 marks) Using the production possibility frontier diagram, show how Greece can be better off once it engages in trade. Explain your answer. b. (4 marks) Suppose Greece imposes a tariff on importing goods, which raises the relative price of the import-competing sector's output. How does the Stolper-Samuelson theorem predict about changes in factor prices in Greece? Why? Explain your answer. c. (4 marks) Suppose the amount of capital stock increased in Greece. What is the prediction of the Rybczynski theorem on changes in the production amounts of cheese and olives in Greece (use the production possibility frontier diagram to illustrate your answer, fully label and explain your diagrams). Consider a 2x2x2 Heckscher-Ohlin model with two countries: Greece and Italy; two goods: olives and cheese; two inputs: labour and capital. Suppose that Greece is capital abundant, and you are given the following information about production and consumption in Greece: Greece Autarky Olive production 500 kilograms Olive consumption 500 kilograms 500 kilograms Cheese production Cheese consumption 500 kilograms Free Trade 400 kilograms 700 kilograms 800 kilograms 400 kilograms a. (8 marks) Using the production possibility frontier diagram, show how Greece can be better off once it engages in trade. Explain your answer. b. (4 marks) Suppose Greece imposes a tariff on importing goods, which raises the relative price of the import-competing sector's output. How does the Stolper-Samuelson theorem predict about changes in factor prices in Greece? Why? Explain your answer. c. (4 marks) Suppose the amount of capital stock increased in Greece. What is the prediction of the Rybczynski theorem on changes in the production amounts of cheese and olives in Greece (use the production possibility frontier diagram to illustrate your answer, fully label and explain your diagrams).

Answer rating: 100% (QA)

a To demonstrate how Greece can benefit from engaging in trade lets analyze the production possibility frontier PPF diagram In the autarky scenario Greece produces and consumes 500 kilograms of olives ... View the full answer