PROBLEMS

1. Question

   Why is the specific-factors model referred to as a short-run model?

   Prob 3 1. Why is the specific-factors model referred to as a short-run model?

2. Question

   Figure 3-7 presents wages in the manufacturing and services sectors for the period 1973 to 2012. Is the difference in wages across sectors consistent with either the Ricardian model studied in Chapter 2 or the specific-factors model? Explain why or why not.

   Prob 3 2. Figure 3-7 presents wages in the manufacturing and services sectors for the period 1973 to 2012. Is the difference in wages across sectors consistent with either the Ricardian model studied in Chapter 2 or the specific-factors model? Explain why or why not.
3. In the gains from trade diagram in Figure 3-3, suppose that instead of having a rise in the relative price of manufactures, there is instead a fall in that relative price.

   1. Question

      Starting at the no-trade point A in Figure 3-3, show what would happen to production and consumption.

      Prob 3 3a. Starting at the no-trade point A in Figure 3-3, show what would happen to production and consumption.

   2. Question

      Which good is exported and which is imported?

      Prob 3 3b. Which good is exported and which is imported?

   3. Question

      Explain why the overall gains from trade are still positive._points: 10

      Prob 3 3c. Explain why the overall gains from trade are still positive.
4. Starting from equilibrium in the specific-factors model, suppose the price of manufactured goods falls so that wages fall from W′ to W in Figure 3-5.

   1. Question

      Show that the percentage fall in the wage is less than the percentage fall in the price of manufacturing so that the real wage of labor in terms of manufactured goods goes up.

      Prob 3 4a. Show that the percentage fall in the wage is less than the percentage fall in the price of manufacturing so that the real wage of labor in terms of manufactured goods goes up.

   2. Question

      What happens to the real wage of labor in terms of agriculture?

      Prob 3 4b. What happens to the real wage of labor in terms of agriculture?

   3. Question

      Are workers better off, worse off, or is the outcome ambiguous?

      Prob 3 4c. Are workers better off, worse off, or is the outcome ambiguous?
5. Use the information given here to answer the following questions: Manufacturing: Sales revenue = P_M · Q_M = 150 Payments to labor = W · L_M = 100 Payments to capital = R_K · K = 50 Agriculture: Sales revenue = P_A · Q_A = 150 Payments to labor = W · L_A = 50 Payments to land = R_T · T = 100 Holding the price of manufacturing constant, suppose the increase in the price of agriculture is 10% and the increase in the wage is 5%.

   1. Question

      Determine the impact of the increase in the price of agriculture on the rental on land and the rental on capital.

      Prob 3 5a. Determine the impact of the increase in the price of agriculture on the rental on land and the rental on capital.

   2. Question

      Explain what has happened to the real rental on land and the real rental on capital.

      Prob 3 5b. Explain what has happened to the real rental on land and the real rental on capital.

6. Question

   If instead of the situation given in Problem 5, the price of manufacturing were to fall by 10%, would landowners or capital owners be better off? Explain. How would the decrease in the price of manufacturing affect labor? Explain.

   Prob 3 6. If instead of the situation given in Problem 5, the price of manufacturing were to fall by 10%, would landowners or capital owners be better off? Explain. How would the decrease in the price of manufacturing affect labor? Explain.
7. Read the article by Lori G. Kletzer and Robert E. Litan, “A Prescription to Relieve Worker Anxiety,” Policy Brief 01-2 (Washington, D.C.: Peterson Institute for International Economics), available online at http://www.iie.com/publications/pb/pb.cfm?researchid=70, which refers to the U.S. recession of 2000 and 2001. Then answer the following:

   1. Question

      Under the version of Trade Adjustment Assistance (TAA) in the United States that they refer to, how many extra weeks of unemployment insurance are workers eligible for? What two criteria must workers meet to qualify for this extra unemployment insurance?

      Prob 3 7a. Under the version of Trade Adjustment Assistance (TAA) in the United States that they refer to, how many extra weeks of unemployment insurance are workers eligible for? What two criteria must workers meet to qualify for this extra unemployment insurance?

   2. Question

      Consider the proposal for “wage insurance” that Kletzer and Litan make in their article. What criteria would workers need to qualify for this insurance? What amount of extra income would they receive from the insurance?

      Prob 3 7b. Consider the proposal for “wage insurance” that Kletzer and Litan make in their article. What criteria would workers need to qualify for this insurance? What amount of extra income would they receive from the insurance?

   3. Question

      If Kletzer and Litan’s new plan for “wage insurance” had been adopted by the United States, what would have been the budgetary cost in 1999, when unemployment was 4.2%? How does this compare with the amount that is now spent on unemployment insurance?

      Prob 3 7c. If Kletzer and Litan’s new plan for “wage insurance” had been adopted by the United States, what would have been the budgetary cost in 1999, when unemployment was 4.2%? How does this compare with the amount that is now spent on unemployment insurance?

8. Question

   In the specific-factors model, assume that the price of agricultural goods decreases while the price of manufactured goods is unchanged (ΔP_A/P_A <; 0 and ΔP_M/P_M = 0). Arrange the following terms in ascending order:
   ΔR_T/R_T     ΔR_K/R_K     ΔP_A/P_A     ΔP_M/P_M     ΔW/W
   Hint: Try starting with a diagram like Figure 3-5, but change the price of agricultural goods instead.

   Prob 3 8.In the specific-factors model, assume that the price of agricultural goods decreases while the price of manufactured goods is unchanged (ΔP_A/P_A <; 0 and ΔP_M/P_M = 0). Arrange the following terms in ascending order:ΔR_T/R_T     ΔR_K/R_K     ΔP_A/P_A     ΔP_M/P_M     ΔW/WHint: Try starting with a diagram like Figure 3-5, but change the price of agricultural goods instead.
9. Suppose two countries, Canada and Mexico, produce two goods: timber and televisions. Assume that land is specific to timber, capital is specific to televisions, and labor is free to move between the two industries. When Canada and Mexico engage in free trade, the relative price of televisions falls in Canada and the relative price of timber falls in Mexico.

   1. Question

      In a graph similar to Figure 3-5, show how the wage changes in Canada due to a fall in the price of televisions, holding constant the price of timber. Can we predict that change in the real wage?

      Prob 3 9a. In a graph similar to Figure 3-5, show how the wage changes in Canada due to a fall in the price of televisions, holding constant the price of timber. Can we predict that change in the real wage?

   2. Question

      What is the impact of opening trade on the rentals on capital and land in Canada? Can we predict that change in the real rentals on capital and land?

      Prob 3 9b. What is the impact of opening trade on the rentals on capital and land in Canada? Can we predict that change in the real rentals on capital and land?

   3. Question

      What is the impact of opening trade on the rentals on capital and land in Mexico? Can we predict that change in the real rentals on capital and land?

      Prob 3 9c. What is the impact of opening trade on the rentals on capital and land in Mexico? Can we predict that change in the real rentals on capital and land?

   4. Question

      In each country, has the specific factor in the export industry gained or lost and has the specific factor in the import industry gained or lost?

      Prob 3 9d. In each country, has the specific factor in the export industry gained or lost and has the specific factor in the import industry gained or lost?
10. Home produces two goods, computers and wheat, for which capital is specific to computers, land is specific to wheat, and labor is mobile between the two industries. Home has 100 workers and 100 units of capital but only 10 units of land.

    1. Question

       Draw a graph similar to Figure 3-1 with the output of wheat on the vertical axis and the labor in wheat on the horizontal axis. What is the relationship between the output of wheat and the marginal product of labor in the wheat industry as more labor is used?

       Prob 3 10a. Draw a graph similar to Figure 3-1 with the output of wheat on the vertical axis and the labor in wheat on the horizontal axis. What is the relationship between the output of wheat and the marginal product of labor in the wheat industry as more labor is used?

    2. Question

       Draw the production possibilities frontier for Home with wheat on the horizontal axis and computers on the vertical axis.

       Prob 3 10b. Draw the production possibilities frontier for Home with wheat on the horizontal axis and computers on the vertical axis.

    3. Question

       Explain how the price of wheat relative to computers is determined in the absence of trade.

       Prob 3 10c. Explain how the price of wheat relative to computers is determined in the absence of trade.

    4. Question

       Reproduce Figure 3-4 with the amount of labor used in wheat measuring from left to right along the horizontal axis and the amount of labor used in computers moving in the reverse direction.

       Prob 3 10d. Reproduce Figure 3-4 with the amount of labor used in wheat measuring from left to right along the horizontal axis and the amount of labor used in computers moving in the reverse direction.

    5. Question

       Assume that due to international trade, the price of wheat rises. Analyze the effect of the increase in the price of wheat on the allocation of labor between the two sectors.

       Prob 3 10e. Assume that due to international trade, the price of wheat rises. Analyze the effect of the increase in the price of wheat on the allocation of labor between the two sectors.
11. Similar to Home in Problem 10, Foreign also produces computers and wheat using capital, which is specific to computers; land, which is specific to wheat; and labor, which is mobile between the two sectors. Foreign has 100 workers and 100 units of land but only 10 units of capital. It has the same production functions as Home.

    1. Question

       Will the no-trade relative price of wheat be higher in Home or in Foreign? Explain why you expect this outcome.

       Prob 3 11a. Will the no-trade relative price of wheat be higher in Home or in Foreign? Explain why you expect this outcome.

    2. Question

       When trade is opened, what happens to the relative price of wheat in Foreign and to the relative price of wheat in Home?

       Prob 3 11b. When trade is opened, what happens to the relative price of wheat in Foreign and to the relative price of wheat in Home?

    3. Question

       Based on your answer to (b), predict the effect of opening trade on the rental on land in each country, which is specific to wheat. What about the rental on capital, which is specific to computers?

       Prob 3 11c. Based on your answer to (b), predict the effect of opening trade on the rental on land in each country, which is specific to wheat. What about the rental on capital, which is specific to computers?
12. In the text, we learned that workers displaced by import competition are eligible for compensation through the Trade Adjustment Assistance program. Firms are also eligible for support through Trade Adjustment Assistance for Firms, a federal program that provides financial assistance to manufacturers affected by import competition. Go to http://www.taacenters.org to read about this program, and answer the following:

    1. Question

       What criteria does a firm have to satisfy to quality for benefits?

       Prob 3 12a. What criteria does a firm have to satisfy to quality for benefits?

    2. Question

       What amount of money is provided to firms, and for what purpose?

       Prob 3 12b. What amount of money is provided to firms, and for what purpose?

    3. Question

       Provide an argument for and an argument against the continued funding of this federal program.

       Prob 3 12c. Provide an argument for and an argument against the continued funding of this federal program.