This problem asks you to evaluate the e?ects of trade versus integration in a HOS model. There are two goods, food and clothing. Food and Clothing are made using capital and labor. The quantity of capital and labor are ?xed. Factors are ?xed in total, but can move from one industry to another.
Suppose that Foreign has the same technology and preferences as Home. Assume that the following ?xed coe?cient technology applies.
Good/Factor Unit Labor Requirement. Unit Capital Requirement
Food 20. 10
Clothing 10. 20
Assume there are 120 units of labor and 120 of capital in total at home and abroad and that expenditure shares on both the goods are 1/2 so that relative demand times relative price is 1.
a. What is the relative price of clothing in the integrated economy?
b. Suppose that there was a disagreement and the two countries separated but still traded with each other, i.e., the integrated economy was un-integrated into Home and Foreign. Home got 70 L and 50 K and Foreign got 50 L and 70 K. How would the trade equilibrium compare to the integrated equilibrium? If it di?ers from the integrated one, how would product prices, factor prices and total output be a?ected? If it does not di?er, explain why.
c. How much is made of each good by each country under trade? How much is traded and by whom? Depict your answers on the PPF’s of the two countries.
d. Draw the FPE region and depict the endowment and consumption points in factor space. What is the factor content of trade? In other words, what does home import and export in terms of embodied factor services?
e. What if Home got 90 L and 30 K and Foreign got 90 K and 30 L? How would the trade equilibrium compare to the integrated equilibrium? If it di?ers from the integrated one, how would product prices, factor prices and total output be a?ected? If it does not di?er, explain why
f. How much is made of each good by each country under trade? How much is traded and by whom? Depict your answers on the PPF’s of the two countries.
g. Does trade always do everything that integration would? Be sure to explain your reasoning.