Econ 321 Midterm 2 UNL

A long run model of trade basic to the determination of how mobile factors of production affect national welfare and the returns to the factors is known as

the Heckscher-Ohlin model

the heckscher-ohlin theorem explains patterns of trade between countries using

abundance or scarcity of resources

the heckscher-ohlin model simplifies the analysis by assuming

there are only 2 nations, with 2 goods ad 2 factors of production

in a capital-intensice industry, the labor/capital ratio will

rise as the wage/rental ratio falls

which of the following statements is NOT an assumption of the heckscher-ohlin model

labor and capital can move freely between the 2 countries

assumptions of the heckscher-ohlin model

-there are 2 countries, each produces 2 goods using labor and capital

-labor and capital can move freely between the production of 2 goods

-there is free trade between the countries

It may be unrealistic to assume that consumer tastes are the same across nations and invariant with respect to income:

but is is an HO assumption because it enables the analysis to focus on other issues that drive trade and prices

wages generally

are lower in labor abundant countries than in capital abundant countries

Malaysia is relatively abundant in labor, whereas Canada is relatively abundant in capital. In both countries, shirt production is relatively more labor intensive than computer production. According to the Heckscher-Ohlin model, Malaysia will have a(n) ________ advantage in the production of __________.

comparative, shirts

The heckscher-ohlin model assumes that factors of production can move freely ______ but can't move ________

domestically; internationally

what was "paradoxical" about Leontiefs test of the HO model on US trade

Leontief concluded that US imports were more capital intensive than US exports

In a labor-abundant country, free trade will cause a(n) __________ in the rental of capital and a(n) _________ in the marginal product of capital.

decrease; decrease

France and Italy only trade with each other. Each produces wine and bread. The production of bread is relatively capital intensive, and the production of wine is relatively labor intensive. France is relatively abundant in capital, while Italy is relatively abundant in labor. According to the HO model, what products will italy export

wine

which of the following features is a characteristic of monopolistic competition

differentiated products

intra-industry trade refers

imports and exports within the same industry

equilibrium in a monopoly occurs when

the monopoly firm produces the quantity that minimizes its profits (or minimizes loss) where MR = MC

which of the following is NOT an assumption for the standard monopolistic competition model

firms produce goods, using a technology with increasing returns to scale

Firm X's total fixed costs are $1,000. Its total variable costs of producing 100 units are $2,000, and its total variable costs of producing 200 units are $4,000. Which of the following will happen to firm X's average costs as it increases output from 100 to 200 units?

firm X's production function exhibits increasing returns to scale

consider the following cost information for a monopolist: MR=$15, MC=$23, producing 9 units of output. which of the following statements is correct

the monopolist should not produce this output because MR < MC

a monopolistic competitor has fixed costs of $100 and marginal costs of $10 per unit. What is its average cost of producing 100 units

$11

in the long run, a monopolistically competitive firm will produce where

average cost = price

the production function F(K,L) = AK^infinity L^1-infinty where 0

constant returns to scale

if exports of an industry are $100 million and imports are 0, which of the following is the value of the index of intra-industry trade

0

larger countries will trade more with one another, this is empirically supported by

the gravity equation

other things equal, the gravity equation predicts that the united states will have more trade with ______ than with _______

canada, bangladesh

the higher the value for the index of intra-industry trade

the greater percentage of trade in that good is intra-industry

import tariffs are ______ on imports, and import quotas are _______ on imports

taxes, limits

suppose that Norway is a small country and currently produces 100,000 board feet of lumber at $600 per 1000 board feet. then it begins to trade at the world price of $500 per 1000 board feet. asa result of trade, noways production falls to 50,000 board feet and its consumption increases to 200,000 board feet. How many board feet of lumber does Norway now import

150,000 board feet

suppose that the equations S=2P and D=6-P represents a small country home supply and home demand curves. If the world price os $1, which of the following is the increase in the country surplus when it trades compared with autarky

$1.50

The united states applies a 25% tariff on imported pickup trucks (mainly from Japan) if the united States is considered to be a "large" country, then

the US price of imported Japanese pickup trucks will increase by less than 25%

what is the major difference between a tariff and a quota that has equivalent effects upon domestic production

domestic producers, (importers) may collect the equivalent of this tariff revenue with a quota

Who collects quota rents when the government gives quota licenses to domestic firms?

domestic producers

consumer surplus is

the difference between the price of a product and what consumers were willing to pay for the product

HO model

-developed by Eli Heckscher and Bertil Ohlin

-trade occurs bc different countries have different resources

-allow all resources to move freely across sectors

-no fixed factors in a sector

-long run model

home country in HO model

-more capital abundant

-produce more of the good that uses more capital than the good that uses more labor

-PPF skews towards computer production

-price line is flatter than foreign; price of computers are cheaper in home country

foreign country in HO model

-more labor abundant

-produce more of the good that uses more labor than capital

-PPF skews towards shoe production

free trade equilibrium

a steeper price line in the home country and a flatter price line in the foreign after trade

Free trade outcome in home country

-partially specializes in computer production at point B and after trade with the foreign country, consumes at point C.

-triangle shaded in graph = trade triangle

free trade outcome in foreign country

higher free trade prices of shoes, foreign specializes in shoes production at point B and consumes at point C

-specializing in and exporting shoes and importing computers

Leontief paradox

expectation- US was more capital abundant, capital-labor ratio in US export should be higher than imports

found- capita-labor ratio in exports was lower than imports

explanations for Leontief paradox

-US and foreign country technology are not the same

-leontief focused on labor and capital and ignored land abundance in US

-no distinction was made between high and low skilled labor, US might be more skilled labor intensive

-data for 1947 may be unusual bc of world war ii

-Us did not (still doesn't) have free trade like model suggests

impact of the increase in relative price of computers on the wage to rental ratio and labor to capital allocation

-an increase in relative price of computers shifts the relative demand curve from RD1 to RD2

-the relative wage decreases from (W/R)1 to (W/R)2

-at the new relative wage, the labor-capital ratio in each industry increases

change in real wage

labor-capital ratio increases in both sectors due to an increase in Pc, law of diminishing marginal returns tells us that the marginal products of labor in both sectors will decrease.

stopler-samuelson theorem

In the long run, when all factors are mobile, an increase in the relative price of a good will increase the real earnings of the factor used intensively in the production of that good and decrease the real earnings of the other factor

Rybczynski Theorem

an increase in the endowment of a factor of production will lead to a disproportionate increase in output of the sector that uses that factor more intensively and a decline in the sector that uses it less intensively.

monopolistic competition

-many producers

-freedom of entry and exit

-long run economic profit of 0

-differentiated goods which gives market power to influence price

increasing returns to scale

average cost of the firm decreases as more output is produced

-as a result, firms tend to specialize in the good that is more successful by selling more of it

intra industry trade

different countries specialize in different varieties of the same type of goods and trade them

monopolistic competition assumptions

-each firm produces a good that is similar to but differentiated from the goods other firms produces

-there are many firms in the industry

-firms produce using a technology with increasing returns to scale

-bc firms can enter and exit freely, monopoly profits are 0 in the long run

index of intra industry trade

tells us what proportion of trade in each product involves both imports and exports

gravity equation

model that mimics the relationship between the force of attraction between two bodies and the distance between them

trade policies

government actions meant to influence the amount of international trade

import tariffs

taxes on imports

import quotas

quantity limits on imports

export subsidies

meaning that the seller receives a higher price than the buyer pays

import tariffs for a small open economy

bc home country is small, addition of the tariff will have no effect on the world price of the good.

-only change is that the home price of the imported good will increase by the tariff since the tariff is applies at the boarder of the home country

deadweight loss

area b+d

cost to efficiency of instituting a tariff as these do not get transferred to ant agent in the economy

-b is the production loss

-d is the consumption loss

import tariff for a large open economy

- upward sloping export supply curve

- export supply to shift to the left bc at every price level, suppliers would be willing to supply less bc of the tariffs

-increase in price of good

-decreases the price the exporters get to keep

optimal tariff

the tariff rate which gives the large importing country the max increase in welfare

-with a steeper export supply curves (lower elasticities of export supply) tariffs should be high, while with flatter export supply curves (higher elasticities of export supply) tariffs should be low

optimal tariff for small open economy

0 bc the elasticity of the export supply curve facing a SOE is infinite

import quotas in SOE

-similar to applying tariff

-at every level of import quota, there is an equivalent import tariff that would lead to the same home price and quantity of imports

quota licenses

giving quota to home firms who do not engage in rent seeking activites

rent seeking

giving the quota to home firms who engage in rent seeking activities

auctioning quota

the government auctions off the quota licenses. Total loss to welfare is -(b+d)

voluntary export restraint

the last possibility for the government of importing country to give the authority for implementing the quota to the government of the exporting country.