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PART II: (15 points) Attempt two of the following exercises. Justify your answers.
Exercise 1:
Suppose that labor is the only factor of production used in the production of two products wine and cheese under constant returns to scale. One unit of labor can produce either cheese or wine but not both. The following table shows the respective marginal productivities of one unit of labor in the production of either wine and cheese in two countries, France and the U.S.
The current wage rate in France is 40 euros per day, while in the U.S. it is $50 per day. Assume that the current exchange rate is one euro per one U.S. dollar. Answer the following questions. Justify your answers.
Exercise 2: Attempt the following questions. Justify your questions
According to the Hecksher-Ohlin model, what is
the effect of an increase in the capital stock of a large labor rich
country on the relative price of its exported product and what are the
adjustment costs that face its capital rich partner under free trade among the
two countries?
According to the Rybczynski Theorem and the Heckscher-Ohlin model of
international trade, to what kind of economic policies the governments of all
countries must commit irrevocably before accepting to allow free trade among
themselves in order to avoid the creation of future economic and social
instability in both countries? Justify your answer.
Does physical capital accumulation help improve the
terms of trade of the exports of certain
labour rich developing countries? Why or why not?
Exercise 3
Attempt the following questions. Justify your answers.
In the early nineteen nineties, Canada, United States, and Mexico entered into a North American Free Trade agreement by which all trade barriers among the three countries were removed except for dairy products. Before 1990, there were significant legal and illegal immigrants into the US and Canada from Mexico.
i) According to the Hecksher-Ohlin model, does the agreement imply that labor will stop moving from Mexico to the United States and Canada?
ii) Why does immigration of Mexican workers into the US continue to be a formidable problem in the US?
For a long time, the terms of trade of the products
exported by many developing countries decreased overtime but their population
growth rates exceeded those of their trade partners capital rich countries. Can we use the
Heckscher-Ohlin model and the Rybczynki theorem to explain this fact? why or why not?
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