week 2

Question 1

what is the 1st assumption of the HOS model

Answer 1

1. countries differ in their endownment mixes/ratios
   Ka/La =/= Kb/Lb

so one country must be capital abundant whilst the other labour abundant

Question 2

what is capital abudance?

Answer 2

when a country endownment ratio put them in favour of supplying capital

Ka/La > Kb/Lb
country A is capital abudant

where capital abudenace describe difference in factor supplies across countries

Question 3

what is the 2nd important assumption of HOS

Answer 3

industries differ on their input mixes
Kx/Lx =/= Ky/Ly
a industry must be capital intensive or labour intensive

Question 4

what does capital/labour intensive mean?

Answer 4

capital intensive:
this refers to capital employed relative to labour if a industry is capital intensive their capital: labour ratio is higher than the other

Ky/Ly > Kx/Lx

Question 5

if good Y is K-intensive, the good X is …

Answer 5

labour intensive

Question 6

what is the PPF in the HOS model

Answer 6

• the PPF is bowed out

- in contrast to RM, there is increase O.C. of producing an extra unit of a good7

Question 7

What is the intuition of why the HOS PPF is bowed out?

in the perspective of producing a labour intensive good

Answer 7

good X is labour intensive

• assume economy overall demand for L increases but as a result demand for K will decrease
• price of wages will increase but the price of capital decreases
• AC of Good x increases relative to AC
• assuming perfect competition the relative price will increase
• PPF become steeper

Question 8

draw a PPF where 2 countries are biased towards 2 different goods.

state which country has a capital advantage in which good

Answer 8

dashed line is national income

basically refer to notes if you cant draw it

Question 9

what do we control when looking at the output mix

Answer 9

control the effect of the output mix on oppounity cost

Question 10

what is autarky

Answer 10

this is when a country has a closed economy?

Question 11

what are the assumptions of AUT

Answer 11

• Production and consumption bundles occur at the same time
• Budget constraint is given by PPF
• Where a country production possibilities deterimine its consumption possibilities  they can only consume what they produce

Question 12

draw AUT points on the PPF form RM and HOS

Answer 12

RM is the linear one

cic= COMMUNITY INDFFERNCE CURVE

Question 13

what is the main assumption of the community indifference curve (cic)

Answer 13

totaL utility is constant

Question 14

what does the autarky equilibirum teach you>

Answer 14

relative price of a good in AUT eqm = the O.C. of producing an extra unit of it

international differences in O.C. drive international trade through their effect ion AUT

Question 15

what is the slope of the PPF defined by

Answer 15

the relative price

Px/Py

Question 16

Trade liberalisation: what are the assumptions? for a small country

Answer 16

countries consumption possibilities are no longer determined by its production possibilities as in AUT

• take goods prices as given

Question 17

where does a country BC under FT lie

Answer 17

BC under FT plots its consumption possibilities under FT if its international trade is balanced

find the production point under FT

BC under FT goes through the pproduction point

Question 18

how does TL affect a countries production bundle, if World relative price =AUT relative price

Answer 18

if world relative price = AUT relative price

• ## AUT will have no effect –> price dont change –> no one changes behaviourif world relative price =/= AUT relative price
• production shift towards the good whose relative price has risen

Question 19

if there is a change in relative price what is the result for both competitive models

Answer 19

RM: specialisation under FT
HOS: a countries typically remains diversified in production

aggregate welfare increase for both countries

Question 20

illustrate effects of trade liberalisation in a small country by plotting RM

• AUT consumption production bundle
• FT consumption/productin bundle
• level of imports and exports

Answer 20

refer to notes