Assignmen: International Economics
1. Consider an economy consisting of two industries and two factors of production. The two industries are low-tech manufacturing (labeled as 1) and high-tech manufacturing (labeled as 2), and the two factors of production are unskilled labor (labeled as U) and skilled labor (labeled as S).
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Sales revenue
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Earnings of unskilled
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Earnings of skilled
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Low-tech (industry 1)
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P_1 Q_1 = 500
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w_U L_U1 = 250
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w_S L_S1 = 250
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High-tech (industry 2)
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P_2 Q_2 = 200
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w_U L_U2 = 50
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w_S L_S2 = 150
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Here, P_1 and P_2 are respectively prices of low-tech and high-tech goods, Q_1 and Q_2 are respectively output of low-tech and high-tech goods, w_U is wage of unskilled labor and w_S is wage of skilled labor, L_U1 is population of unskilled labor in industry 1, and L_S1 is population of skilled labor in industry 1, and so on.
Suppose that because of more integration to the world economy, price of the low-tech good falls by 5%, and price of the high-tech good rises by 5%. The following equations describe how changes in prices and factor rewards are related:
(ΔP_1)/P_1 =θ_U1 (Δw_U)/w_U +θ_S1 (Δw_S)/w_S
(ΔP_2)/P_2 =θ_U2 (Δw_U)/w_U +θ_S2 (Δw_S)/w_S
Here, θ_U1, θ_S1, θ_U2, θ_S2 are the cost shares of each factor in each industry.
Calculate θ_U1, θ_S1, θ_U2, θ_S2 and specify the skill-intensive industry.
Find changes to wages of unskilled and skilled labor. Use your numerical solution to explain the implications for real wage inequality.
2. The following table reports data on soybean yield, production, and trade for 2010-11.
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Yield (metric ton/hectare)
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Production (100,000 metric ton)
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Export (100,000
metric ton)
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Import (100,000
metric ton)
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Australia
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1.71
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0.29
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0.025
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0.007
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Brazil
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3.12
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748.2
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258
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1.18
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Canada
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2.75
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42.5
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27.8
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2.42
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China
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1.89
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144
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1.64
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570
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France
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2.95
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1.23
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0.24
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5.42
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Japan
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1.60
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2.19
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0.0006
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34.6
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Mexico
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1.32
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2.05
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0.001
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37.7
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Russian Federation
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1.48
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17.6
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0.008
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10.7
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United States
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2.79
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831
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423
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4.45
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Source: Food and Agriculture Organization.
Suppose that the countries listed in the table are engaged in free trade, and that soybean is land-intensive. Answer the following questions based on the assumptions and predictions of the H-O model.
Which countries are land-abundant?
In which countries do landowners benefit from free trade in soybean? In which countries do landowners lose from free trade in soybean? Explain.
3. For this question, you are supposed to study your textbook, Chapter 5, pages 96-102. If you do not own the textbook, three copies are on reserve, available for you in Parrish library.
International trade is a usual suspect as a cause behind the recent rise in wage inequality in the United States. However, many researchers do not believe that international trade is the main cause.
Briefly explain three reasons for why researchers believe trade is not the main cause.
Briefly explain how skilled-biased technological change is a more believable cause behind the rising wage inequality.
Type your answer and limit it to a total of less than 300 words.