Chapter 4, Specific Factors and Income Distribution Video Solutions, International Economics: Theory and Policy

Problem 1

In $1986,$ the price of oil on world markets dropped sharply. since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana, 1986 was a year of economic decline. Why?

Jennifer Stoner

Numerade Educator

01:35

Problem 2

An economy can produce good 1 using labor and capital and good 2 using labor and land. The total supply of labor is 100 units. Given the supply of capital, the outputs of the two goods depend on labor input as follows:
$$\begin{array}{cccc}
\text { Labor Input } & \text { Output } & \text { Labor Input } & \text { Output } \\
\text { to Good 1 } & \text { of Good 1 } & \text { to Good 2 } & \text { of Good 2 } \\
\hline 0 & 0.0 & 0 & 0.0 \\
10 & 25.1 & 10 & 39.8 \\
20 & 38.1 & 20 & 52.5 \\
30 & 48.6 & 30 & 61.8 \\
40 & 57.7 & 40 & 69.3 \\
50 & 66.0 & 50 & 75.8 \\
60 & 73.6 & 60 & 81.5 \\
70 & 80.7 & 70 & 86.7 \\
80 & 87.4 & 80 & 91.4 \\
90 & 93.9 & 90 & 95.9 \\
100 & 100 & 100 & 100
\end{array}$$
a. Graph the production functions for good 1 and good 2
b. Graph the production possibility frontier. Why is it curved?

Jennifer Stoner

Numerade Educator

02:57

Problem 3

The marginal product of labor curves corresponding to the production functions in problem 2 are as follows:
$$\begin{array}{ccc}
\text { Workers Employed } & \text { MPL in Sector 1 } & \text { MPL in Sector 2 } \\
\hline 10 & 15.1 & 15.9 \\
20 & 11.4 & 10.5 \\
30 & 10.0 & 8.2 \\
40 & 8.7 & 6.9 \\
50 & 7.8 & 6.0 \\
60 & 7.4 & 5.4 \\
70 & 6.9 & 5.0 \\
80 & 6.6 & 4.6 \\
90 & 6.3 & 4.3 \\
100 & 6.0 & 4.0 \\
\hline
\end{array}$$
a. Suppose that the price of good 2 relative to that of good 1 is $2 .$ Determine graphically the wage rate and the allocation of labor between the two sectors.
b. Using the graph drawn for problem 2 , determine the output of each sector. Then confirm graphically that the slope of the production possibility frontier at that point equals the relative price.
c. Suppose that the relative price of good 2 falls to $1.3 .$ Repeat $(\mathrm{a})$ and $(\mathrm{b})$
d. Calculate the effects of the price change from 2 to 1.3 on the income of the specific factors in sectors 1 and 2

Banhishikha Sinha

Numerade Educator

01:35

Problem 4

Consider two countries (Home and Foreign) that produce goods 1 (with labor and capi-
tal) and 2 (with labor and land) according to the production functions described in problems 2 and $3 .$ Initially, both countries have the same supply of labor ( 100 units each), capital, and land. The capital stock in Home then grows. This change shifts out both the production curve for good 1 as a function of labor employed (described in problem 2 ) and the associated marginal product of labor curve (described in problem 3). Nothing happens to the production and marginal product curves for good 2
a. Show how the increase in the supply of capital for Home affects its production possibility frontier.
b. On the same graph, draw the relative supply curve for both the Home and the Foreign economy.
c. If those two economies open up to trade, what will be the pattern of trade (i.e., which country exports which good)?
d. Describe how opening up to trade affects all three factors (labor, capital, land) in both countries.

Jennifer Stoner

Numerade Educator

01:35

Problem 5

In Home and Foreign there are two factors each of production, land, and labor used to produce only one good. The land supply in each country and the technology of production are exactly the same. The marginal product of labor in each country depends on employment as follows:
$$\begin{array}{cc}
\begin{array}{c}
\text { Number of Workers } \\
\text { Employed }
\end{array} & \begin{array}{c}
\text { Marginal Product } \\
\text { of Last Worker }
\end{array} \\
\hline 1 & 20 \\
2 & 19 \\
3 & 18 \\
4 & 17 \\
5 & 16 \\
6 & 15 \\
7 & 14 \\
8 & 13 \\
9 & 12 \\
10 & 11 \\
11 & 10 \\
\hline
\end{array}$$
Initially, there are 11 workers employed in Home, but only 3 workers in Foreign. Find the effect of free movement of labor from Home to Foreign on employment, production, real wages, and the income of landowners in each country.

Jennifer Stoner

Numerade Educator

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Problem 6

Using the numerical example in problem $5,$ assume now that Foreign limits immigration so that only 2 workers can move there from Home. Calculate how the movement of these two workers affects the income of five different groups:
a. Workers who were originally in Foreign
b. Foreign landowners
c. Workers who stay in Home
d. Home landowners
e. The workers who do move

Rashmi Sinha

Numerade Educator

00:41

Problem 7

Studies of the effects of immigration into the United States from Mexico tend to find that the big winners are the immigrants themselves. Explain this result in terms of the example in the question above. How might things change if the border were open, with no restrictions on immigration?

Jennifer Stoner

Numerade Educator