Trade Problem Set 60 2-3

1. Consider an H-O economy in which there are two countries (US and France), two goods (wine and cheese) and two factors (capital and labor). In each question below you are given partial information about the model and asked to infer some other part. Treat each question separately and independently.

A. Assume the US is labor-abundant and cheese is labor-intensive. What is the pattern of trade in free trade? (State what the US and France import and export). Which theorem is applied to get this answer? Explain.

B. Suppose an increase in the labor force in the US causes cheese production to increase. Which factor is used intensively in wine production? Which H-O theorem is applied to get this answer? Explain.

C. Suppose a decrease in the price of cheese causes a decrease in the wage rate in the US economy. Which factor is used intensively in cheese production in France? Which H-O theorem is used to get this answer? Explain.

D. Suppose France exports wine, the capital-intensive good. Which factor benefits from free trade in the US? Explain.

E. Suppose workers in France benefit when tariffs are increased on cheese imports. Which factor is used intensively in cheese production? What is France's abundant factor? Explain.

International Trade Theory and Policy - Chapter 60: Last Updated on 1/06/08