Consider a hypothetical world with two countries: A and B. All the general assumptions of the...
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Consider a hypothetical world with two countries: A and B. All the general assumptions of the specific-factors model hold in this hypothetical world. Country A has a comparative advantage in the production of good 1 and country B has a comparative advantage in the production of good 2. Both industries use constant return to scale production technology. Country A's production technology in industry 1 is described by the production function Q₁ = K0.3L₁0.7, where Q₁ is the output of good 1, K is the capital input and L₁ is the labor input in industry 1. Country A's production technology in industry 2 is described by Q₂ = T0.7L₂ where Q₂ is the output of good 2, T is the land input and L2 is the labor input in industry 2. Labor is perfectly mobile across industries. 0.3 1) (2 points) Derive the real wage of country A's workers in terms of good 1 and good 2 as functions of K, T, L₁, and L2. 2) (5 points) Analyze the impact of trade on the real wage of country A's workers in terms of good 1 and good 2 using results from part 1). 3) (4 points) Assume a worker owns 1 unit of labor. Write down the budget constraint of a worker in country A. Draw the change in the budget constraint of this worker when country A moves from autarky to free trade (good 1 on the horizontal axis). Comment on the welfare changes of this worker. Consider a hypothetical world with two countries: A and B. All the general assumptions of the specific-factors model hold in this hypothetical world. Country A has a comparative advantage in the production of good 1 and country B has a comparative advantage in the production of good 2. Both industries use constant return to scale production technology. Country A's production technology in industry 1 is described by the production function Q₁ = K0.3L₁0.7, where Q₁ is the output of good 1, K is the capital input and L₁ is the labor input in industry 1. Country A's production technology in industry 2 is described by Q₂ = T0.7L₂ where Q₂ is the output of good 2, T is the land input and L2 is the labor input in industry 2. Labor is perfectly mobile across industries. 0.3 1) (2 points) Derive the real wage of country A's workers in terms of good 1 and good 2 as functions of K, T, L₁, and L2. 2) (5 points) Analyze the impact of trade on the real wage of country A's workers in terms of good 1 and good 2 using results from part 1). 3) (4 points) Assume a worker owns 1 unit of labor. Write down the budget constraint of a worker in country A. Draw the change in the budget constraint of this worker when country A moves from autarky to free trade (good 1 on the horizontal axis). Comment on the welfare changes of this worker.
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Macroeconomics Principles, Applications, and Tools
ISBN: 978-0132555234
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
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