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.

1. According to the Ricardian comparative advantage model, would the US produce both products and refuse to trade with France since it has a higher marginal productivity in both products?
2. Fill in the table below, calculating French prices using the wage rate of 40 euros per day and U.S. prices using the wage rate of $50 per day. Price of Wine and Cheese in France and the U.S.

1. Market participants in the real world do not know economic theory, they are guided by profits and prices. Will the high productivity country in this example initially dominate trade? How would the other country pay?
2. Are your answers to b) and c) consistent?
3. Suppose the exchange rate between France and the U.S. is fixed at one euro per one U.S. dollar and cannot change. Explain why the situation given in the price table above is a disequilibrium situation and how wages and prices will change in France and the U.S.
4. Now suppose that wages in France and the U.S. cannot change, but the exchange rate is allowed to vary. What will happen to the exchange rate and to prices in the U.S., expressed in euros?
5. What is the condition for France to maintain a fixed exchange rate of one euro for one dollar and benefit from trade with the US?

Exercise 2: Attempt the following questions. Justify your questions

1. Discuss whether the following assertion is true or false and explain why using the properties of the Heckscher-Ohlin model:
   “According to the Hecksher-Ohlin model, with two factors of production (capital and labor) and two goods, immigration of foreign workers into Germany would decrease the amount of capital intensive products produced in Germany and reduce workers income”.

2. 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?

3. What is the difference between intra-industry trade and inter-industry trade? Could both types of free trade coexist and why?
4.  

   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.

5. 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.

1. Can the Heckscher-Ohlin and the Ricardo Comparative Advantage models explain the trade among economically advanced countries with similar economic structures?

2. 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?

3. Consider a world of two goods, two countries, one is capital rich and the other one is labour rich, one good is capital intensive and the other labor intensive, where factors of production cannot move across countries but within each country capital is immobile and labor is mobile. Let free trade take place between the two countries.
   Which factor of production owners in the labour rich country will oppose free trade and try to establish a government that opposes free trade and impose tariffs or import quotas of which good?

4. Can we use the theory of monopolistic competition to explain the fact that a country exports and imports the same type of product? Justify your answer.

5. 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?