International Trade problem.
Consider an economy with two sectors, high tech (H) and low tech (L), and three types of workers: scientists (S), managers (M) and blue-collar (B). S and B are the septic factors of the H and L sectors, respectively. Managers can work in both sectors. Workers cannot switch occupations (for example, a scientist cannot work as a manager).The economy is endowed with 50 blue-collar workers, 10 scientists and 40 man-agers. PH and PL are prices of the H and L goods, respectively. wS, wM and wB represent nominal wages of each group of workers.
(A) The production function in the H sector is:
QH(MH, S) = SMh^1/2
Solve the ?rm’s pro?t maximization problem. What is the demand for managers in the H sector? (Since S is a ?xed factor, ?rms in the H sector have to choose M only).(B) The production function in the L sector is:
QL(ML, B) = BMl^1/2
(C) Assume that the economy is closed and PL = 1 and PH = 10. What is thequantity of managers employed by each sector? Calculate wS, wM , wB, QH and
QL. Calculate real wages for each group (for example, wS PH , wS PL and so on). (Hint: the deference between revenues and the total amount of wages paid to managers in a sector is the aggregate income of the speci?c factor used by the sector).
(D) Suppose we open the economy to international trade. The international prices1
(Which are taken as given by the home economy) are PL = 1 and PH = 15. In other words, we assume that the economy has comparative advantage at producing the H good and will export it. Calculate wS, wM , wB, QH and QL. What are the real wages of each group?
(E) Compare real wages in the two scenarios. Which group is made better o? by trade? Which group is worse o??
(F) Political Economy Home country is a genuine democracy, which means thatif a policy is not supported by more than 50% of voters it is not approved. In this case, will the economy open to trade? Do democracies present a political bias against trade?
(G) Political Economy If political representation increases with wealth/income, will trade be approved?
(H) Political Economy According to Bernie Sanders ”America’s trade agreements benefit large multinational corporations and Wall Street, but are a disaster for working families.” Discuss this quote based on what you learned about the septic factors model.
(I) Political Economy If Sanders is right, is trade prohibition the best policy to follow?