week 4

Question 1

what is the common result under HOS for free trade

Answer 1

under FT. a country will export the good that it intensively uses its abundant factor in production

Question 2

draw a diagram of 2 large countries in HOS

AUT in hos model

Answer 2

country is A is capital abundant

country B

Question 3

what are the results of trade liberalisation in HOS model

between 2 large countries

what happens to world price

Answer 3

1. country B exports more good X (remains diversified)
2. country A in contrast has the oppisite effect, they import X and export Y
3. world equ –> export by co = import by pther country
4. FT equ must have world price under FT between country AUT prices
   - -> otherwise both countries will attempt to export the same good under FT**
5. across countries production mix becomes different whilst consumption mix becomes similar

Question 4

what are the results of trade liberislation in HOS

country B CA with good X

Answer 4

1. under FT country B will export good X (their CA good) –> in line with HOS
2. Country B will have the oppisite effect
3. world equilibirum where exports by one co. = imports by one co.
4. FT equilibrium must have world price under FT between countries AUT prices.
5. trade liberlisation: production mixes become more different but consumption mix becomes more similar

Question 5

why must FT equilbrium must have World price between countries AUT prices?

Answer 5

otherwise bothc ountries will try to export the same good

Question 6

what happens to a country consumption and production mix under trade liberlisation in HOS

Answer 6

production mix becomes more differnet whilst consumption become more similar

production: countries CA industry grows as a result

Consumption:they have identical preferences