Finance

Due on Wednesday September 28 BEFORE class (10:20am).

Please turn in a hard copy of the homework for the whole group. Please note that late homework or homework sent by email will not be accepted.

Group #: __________

Name ________________________ PID# ______________________

Name ________________________ PID# ______________________

Name ________________________ PID# ______________________

Name ________________________ PID# ______________________

1. This problem uses the Heckscher-Ohlin model to predict the direction of trade. Consider the production of handmade rugs and assembly line robots in Canada and India.

a. Which country would you expect to be relatively labor-abundant, and which is capital-abundant? Why? (Hint: Read slide #6 of chapter 3 power points and textbook p. 92)

b. Which industry would you expect to be relatively labor-intensive, and which is capital-intensive? Why? (Hint: Read slide #6 of chapter 3 power points and textbook p. 91)

c. Given your answers to (a) and (b), draw production possibilities frontiers for each country. Assuming that consumer preferences are the same in both countries, add indifference curves and relative price lines (without trade) to your PPF graphs. What do the slopes of the price lines tell you about the direction of trade? (Hint: read slides #10-12 and textbook pp.94-96.)

d. Allowing for trade between countries, redraw the graphs and indicate the volume of imports and exports. (Hint: read slides #13-19 and textbook pp. 96-99.)

2. Suppose when Russia opens to trade, it imports automobiles, a capital-intensive good.

a. According to the Heckscher-Ohlin theorem, is Russia capital-abundant or labor-abundant? Briefly explain. (Hint: read slide #19 and textbook p. 100)

b. What is the impact of opening trade on the wage in Russia? (Hint: read slides #21-22 and textbook pp.115-116. It is sufficient if you provide the economic intuition. No equations are needed.)

c....