M2

Question 1

What is the set-up of the HO model?

Answer 1

2 countries (home and foreign); 2 industries (computers and shoes); 2 FoPs (capital and labor)

Question 2

What are the 6 assumptions of the HO model?

Answer 2

(1) K and L are mobile across industries; (2) Computers are K-intensive while shoes are L-intensive; (3) Home is K-abundant while foreign is L-abundant; (4) K and L are not mobile across countries but the final outputs are; (5) Identical technology in both countries; (6) Identical consumer preferences across countries

Question 3

In HO model, which good has a cheaper relative price in autarky?

Answer 3

the industry that uses the abundant factor intensively has a cheaper relative price (computers relatively cheaper in home; shoes relatively cheaper in foreign)

Question 4

HO theorem

Answer 4

each country exports the good that intensively uses the factor they are abundant in and imports the other good

Question 5

Stolper-Samuelson theorem

Answer 5

abundant factor gains and scarce factor loses (e.g. workers lose, capital owners gain in home)

Question 6

Which factors gain and lose in the SR due to immigration?

Answer 6

workers lose due to decrease in MPL and real wage, capital and land owners gain due to increases in MPK, MPT, and real rentals

Question 7

Which factors gain and lose in the SR due to immigration?

Answer 7

neither workers nor capital owners gain or lose due to factor price insensitivity

Question 8

Rybczynski theorem

Answer 8

an increase in the endowment of one factor (labor) increases the output of the industry that uses that factor intensively and decreases the output of the other industry

Question 9

Factor price insensitivity theorem

Answer 9

an increase in the amount of a factor (labor) found in an economy can be absorbed by changing the outputs of the industries, without any change in the factor prices (W/R)

Question 10

What is monopolistic competition?

Answer 10

a type of imperfect competition (combination of monopoly and perfect competition) with numerous firms that each have some pricing power

Question 11

2 key features of a monopolistic competition

Answer 11

(1) firms produce differentiated goods and (2) enjoy increasing returns to scale

Question 12

What is intra-industry trade?

Answer 12

imports and exports within an industry

Question 13

Marginal revenue

Answer 13

extra revenue earned from selling another unit

Question 14

3 assumptions of the monopolistic competition model

Answer 14

(1) Firms produce similar but differentiated goods; (2) There are many firms in the industry; (3) Firms produce using a technology with increasing returns to scale (average costs fall as output rises); (4) Monopoly profits become zero in the long-run as firms enter and exit the industry freely

Question 15

What drives trade under monopolistic competition?

Answer 15

increasing returns to scale, even if home and foreign are identical (e.g. in number of consumers, technology, number of firms)

Question 16

Gains and adjustment costs for Canada under CUSFTA

Answer 16

decline in unemployment but offset by creation of new manufacturing jobs and increased productivity

Question 17

Gains and Adjustment costs for Mexico under NAFTA

Answer 17

increased productivity in maquiladoras over the rest of Mexico but decline in real wages due to the devaluation of the peso; skilled workers in maquiladoras gained more than unskilled workers in maquiladoras and the rest of Mexico;

Question 18

Trade Adjustment Assistance

Answer 18

program in the US that offers assistance to workers in manufacturing who lost their jobs due to import competition

Question 19

2 sources of gains from trade in the monopolistic competition model

Answer 19

(1) rise in productivity in surviving firms, which leads to lower prices; (2) greater product variety available to consumers

Question 20

Rules of origin

Answer 20

features in free-trade agreements (e.g. USMCA) that specify a certain amount of a product must be made in the free-trade area (e.g. NA) in order to be shipped tariff-free between countries

Question 21

Index of intra-industry trade

Answer 21

indicates what proportion of trade in each product involves imports and exports

Question 22

High vs low index of intra-industry trade

Answer 22

equal amount of the good is imported and exported (up to 100%); a good is either imported or exported but not both (0%)

Question 23

Gravity equation

Answer 23

the larger the two countries are, or the closer they are, the greater the amount of trade

Question 24

Why do larger countries import and export more?

Answer 24

import more because of higher demand and export more because of greater product variety

Question 25

Border effects

Answer 25

factors that make it easier or more difficult to trade between countries (e.g. tariffs, quotas)

Question 26

Leontief’s paradox

Answer 26

US was importing K-intensive goods despite being abundant in K in 1947

Question 27

2 modifications in HO model to explain trade flows better

Answer 27

(1) allow for multiple goods, factors, and countries; (2) allow for productivity differences across countries

Question 28

When is a country abundant in a particular factor?

Answer 28

when it’s share of the world endowment of the factor is greater than its share of the world GDP

Question 29

Effective factor endowment

Answer 29

actual factor endowment x factor productivity

Question 30

What happened in the 1980 Mariel boat lift?

Answer 30

increase in unskilled workers in Miami from Cuba led to an increase in output of the unskilled-intensive apparel industry and a decrease in the output of skilled-intensive industries, with wages unchanged