(Full Ricardian Model: Basic (30 points)) Consider 2 countries, Holland and Swed
ID: 1146744 • Letter: #
Question
(Full Ricardian Model: Basic (30 points))
Consider 2 countries, Holland and Sweden (H and S). The marginal productivities of one year of labor in the industries Machinery (M) and Furniture (F) are given in the following table:
Marginal Productivity of One Year of Labor
Machinery (tons)
Furniture (tons)
Holland
3
3
Sweden
2
4
Each country has a population of 10 million people, all of whom provide one unit of Labor.
Graph the PPFs for Holland and Sweden. Throughout the problem, put Machinery on the X-Axis.
As in lecture, assume that the national utility function is the same in each country and given by a Cobb-Douglas formula: U(M,F)=M1/2F1/2.
What is the formula for the Marginal Rate of Substitution?
In autarky, what is the production/consumption levels of M and F in Holland? In Sweden?
What is the utility level for Holland in Autarky? For Sweden?
Plot the excess demand and excess supply curves for Machinery at world price ratios (P=Pm/Pf) betgreater than 1. (As part of this, you’ll need to determine which country is the excess demander and which is the excess supplier for M.)
At what price ratio does excess demand equal excess supply for Machinery?
At the price ratio you found in part f, how much Furniture is exchanged across the countries?
After trade, what is the utility level for Holland? For Sweden?
Machinery (tons)
Furniture (tons)
Holland
3
3
Sweden
2
4
Explanation / Answer
How open are the advanced economies to trade with each other? In this paper, openness is calculated relative to the predictions of the monopolistic competition trade model using data on manufacturing trade and production in the OECD in 1985. The paper finds that (1) Japan imports much less than other large OECD countries, while the European countries have larger import volumes than does the US, (2) Japan and the US engage in less intra-industry trade than the rest of the OECD, and (3) the EU countries are less open to imports from Japan and the US than those countries are open to imports from the EU.
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