MIDTERM - FALL, 2013

ECO-13101 Economia Internacional I (International Trade Theory) October 16, 2013 Instructions: Write your name and clave on the rst page of your answer booklet/sheets and on the question booklet/sheets. Number all the sheets carefully, and staple them with the question sheets. You have 1 hour and 30 minutes to nish the exam. All questions have to be answered. All the best! Question 1 (60 points) Consider a world with two countries, home (h) and foreign (f ). Both countries produce two goods, X and Y , using three inputs, land (N ), labor (L) and capital (K ). Output of each good in country j = {h, f } is given by the following production function:
j X j = Kx

Lj x

j Nx

j , Y j = Ky

Lj y

j Ny

where 0 < , , , < 1, + < 1, + < 1. Assume perfect mobility of factors across the two sectors within each country and perfectly competitive markets. Denote the return to land, labor and capital by qj , wj and rj in country j . Let the prices of the two goods in country j be denoted
j by pj x and py .

1. (10 points) Set up the prot maximization problem of the rms in the two sectors. Obtain the rst order conditions. 2. (20 points) Use the rst-order conditions to express the labor-to-land ratio and the capitalto-land ratio of each sector as a function of the factor price ratios ( wjj and and parameters. 3. (20 points) Use the result from the previous part to derive an expression for the price ratio
j j ( pj x /py ) as function of factor price ratios ( rj and q qj wj ) q qj rj ,

respectively)

and parameters.

4. (10 points) When these countries trade (suppose the world prices are p x and py ), will factor

price equalization necessarily hold? Why or why not? Explain your answer by using the expression for price ratio derived in part (3). Question 2 (40 points) Consider a world with two countries, home (h) and foreign (f ). Both countries produce two goods - cars (c) and televsions (tv ). Labor (L) is the only factor of production. The production functions, labor endowments and wages in the two countries are given below: 1

Home Production of Cars Production of Televisions Labor force Wage Qc = 3Lc Qtv = 2Ltv 400 $6000

Foreign Qc = 2Lc Qtv = 3Ltv 400 900

1. (10 points) Which country has absolute advantage in which good? 2. (10 points) Compute the autarky prices of the two goods in the two countries and compare the autarky price ratios (Pc /Ptv ). What is the pattern of comparative advantage? Explain the intuition. 3. (10 points) Suppose home consumes 900 cars and 200 televisions and foreign consumes 200 cars and 900 televisions. What fraction of income is spent on cars and televsions in home and foreign? 4. (10 points) Write down Cobb-Douglas utility functions for the home and foreign consumers which would be consistent with your answer to part (3).