International Economy Hw

ECON 335 – International Economy
Dr. Huiran Rachel Pan

Homework 2_Answer(Chapters 4-7)

Chapter 4 (End of Chapter Questions)
3.

Consider the following data on the factor endowments of two countries, A and B:
Countries
A
B
45
20

Labor Force
(millions of workers)
Capital Stock
(thousands of machines)

15

10

(a) Which country is relatively capital abundant?
(b) Which country is relatively labor abundant?
(c) Suppose that good S is capital intensive relative to good T. Which country will have comparative advantage in the production of S? Explain.
Answer:
First, both countries have more labor than machines. But country A’s labor-capital ratio is three-to-one, while B’s is only two-to-one. Thus country A is relatively labor abundant, and country B must be relatively capital abundant. Alternatively, country A has three thousand workers for every machine (45,000,000/15,000), while country B has two thousand workers per machine. Thus country B is relatively capital abundant, and country A is relatively labor abundant. From the HO theorem, we know the labor-abundant country A will have comparative advantage in the relatively labor-intensive good (T), and the capital-abundant country B will have comparative advantage in the relatively capital-intensive good (S).

1

ECON 335 – International Economy
Dr. Huiran Rachel Pan
5.

Homework 2_Answer(Chapters 4-7)

Australia is land abundant; India is labor abundant. Wheat is land intensive relative to textiles.
(a) Graphically demonstrate the pre- and post-trade equilibria between these two countries.
(b) Find and label the trade triangles for each.
(c) Which factors gain and which factors lose when trade arises between these two countries?
Explain carefully.
Answer:
See the graph below.
(a) In Australia, pre-trade equilibrium is point a, with relative price of wheat of