Dornbusch, Fischer and Samuelson

Question 1

Model assumptions?

Answer 1

Trade due to technological differences
One production factor (labor): L and L*
Homothetic preferences, are not necessarily identical
No trade costs
Perfect competition
New assumption: many goods z on a continuous measure [0,1]

Question 2

Production Home and Foreign when? (Autarky)

Answer 2

Home: w/w< A(z)
Foreign: w/w>A(z)

Question 3

Production Home and Foreign when? (Free Trade)

Answer 3

Home: w/w>A(z)
Foreign: w/w<A(z)
z’ cut-off

Question 4

Utility and Wages

Answer 4

B(z) increases in z because a higher wage at home increases the share of home in global consumption and, hence, it must also account for a larger share of global production for trade to be balanced. (intuition: if a larger share of goods is produced at home, the greater demand leads to a higher wage at home).
The intersection of A(z) and B(z) determines equilibrium wages and shares of goods produced at home and abroad.

Question 5

Explain mathematical gains from trade

Answer 5

Answer page 10

Question 6

What are the consequences of productivity growth in a partner country?

Answer 6

Productivity growth in the partner country has offsetting effects. On the one hand, lower labor requirements lower the prices of partner’s exports. However, higher wages offset that gain. Matsuyama (2008) discusses this in detail, concluding that the home country can lose due to the partner’s productivity growth but still gains from trade overall.