Impact of Capital Increase and Trade on Production and Income Distribution, Ejercicios de Economía Internacional

¡Descarga Impact of Capital Increase and Trade on Production and Income Distribution y más Ejercicios en PDF de Economía Internacional solo en Docsity! PROBLEM SET 4: SPECIFIC FACTORS AND INCOME DISTRIBUTION 4. a) When we increase the supply of capital, the production possibilities from good 1 increase, because it is produced with capital and labor. While the possibilities for the good 2 remain the same because it is not affected by capital. As a result, the production possibility frontier (PPF) moves towards the right. 100 — The Production Possibility Frontier (PPF) Outputof good 2 100 Outputof good 1 b) With the increase in capital in the Home country, it will be able to produce more good 1, while the quantity that it can produce from good 2 is still the same. In consequence, the relative supply of Home country increases. RSE 100 == RS y On the other hand, there has not been any changes in the Foreign country factors of production so there is no change in their relative supply. Output of good 2 100 Output of good 1 If these two economies open up to trade, the Home country would decide to specialize in the good that - RS2 it is more efficient in producing. In 3 RS7 the case of this country it would be S good one. When trading this a product, its relative price of good 1 E in terms of good 2 would increase. 2 (epa Consumers react to this change by (pupa demanding relatively more good 2. RD So the Home country will export good 1 while importing good 2 from Relative Quantity good 1 the Foreign country. d) 'Trade benefits the factor specific to the export sector of each country but hurts the factor specific to the import-competing sectors, with ambiguous effects on mobile factors.” In this case, in the Home country, the capital owners will benefit from the increase in wealth, while the land owners, responsible for the good 2 production will get worse as their product is now imported from the Foreign country. In the case of labor, the change ¡is ambiguous because it is a mobile factor. 5. Numbers of workers 1 2 3 4 5 6 7 8 9 10 11 employed Marginal product of 20 19 18 17 16 15 14 13 12 11 10 labor lf no obstacles to labor migration exist, workers move from Home to Foreign until the purchasing power of wages is equal across countries. In this case, 4 workers move to Foreign leaving 7 workers in each country. Emigration from Home decreases the supply of labor and the production, but marginal productivity increases from 10 to 14, so it raises the real wage of the workers who remain there.