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GainsandLossesfromTradeintheSpecific-FactorsModel1.Whyisthespecific-factorsmodelreferredtoasashort-runmodel?Answer:Itisashort-runmodelbecauselandandcapitalarespecifictoaparticularsectorandonlylaborismobilebetweenthesectors.2.Figure3-7presentswagesinthemanufacturingandservicessectorsfortheperiod1973to2009.IsthedifferenceinwagesacrosssectorsconsistentwitheithertheRicardianmodelstudiedinChapter2orthespecific-factorsmodel?Explainwhyorwhynot.Answer:Thedifferenceinwagesacrossthesectorsimpliesthatthetheoreticalas-sumptionofequalizedearningsbetweenthedifferentindustriesisasimplificationoftheRicardianandspecific-factorsmodels.3.Inthegainsfromtradediagram(Figure3-3),supposethatinsteadofhavingariseintherelativepriceofmanufactures,thereisafallinthatrelativeprice.a.StartingattheautarkypointAinFigure3-3,showwhatwouldhappentopro-ductionandconsumption.Answer:S-193U1U2ABCOutputofmanufacturing,QMOutputofagriculture,QAAsseeninthepreviousdiagram,afallintherelativepriceofmanufacturesisshownbythesmallerslope(inabsolutevalue)oftheinternationalpriceline.ThecountryproducesatpointB,atwhichtheinternationalpricelineintersectsitsPPF.Thehigherrelativepriceofagricultureattractsworkersintothatsectorsuchthattheoutputofagricultureincreasesandtheoutputofmanufacturedgoodsdecreases.Nowthehighestlevelofutilityisachievedwherethehighestpossibleindifferencecurveintersectswiththenewpriceline(atC).Theincreaseinutilitysignifiedbythehigherindifferencecurveisameasureofgainsfromtrade.b.Whichgoodisexportedandwhichisimported?Answer:Thedecreaseintherelativepriceofmanufacturesinthetradeequilib-rium(comparedwithautarky)alsomeansthatthecountryisimportingmanu-facturedgoodsandexportingagriculturalgoods.c.Explainwhytheoverallgainsfromtradearestillpositive.Answer:Overallgainsfromtradearestillpositivebecausethecountryisabletosellagricultureatahigherpriceandbuymanufacturedgoodsatalowerpricethanitcouldhaveinautarky.Thefactthattherelativeprice(ofmanufacturedgoods)fellwithtradeindicatesthattheforeigncountry’sautarkyrelativepricewaslower.Thatis,inthiscasethecountryhasacomparativeadvantageinagri-culture.InFigure3-4,thecaseillustratedisoneinwhichthecountryhasacom-parativeadvantageinmanufacturinggoodsandthustheirexportleadstoanin-creaseintheirrelativeprice.4.Startingfromequilibriuminthespecific-factorsmodel,supposethepriceofmanu-facturedgoodsfallssothatwagesfallfromWtoWinFigure3-5.a.Showthatthepercentagefallinwagesislessthanthepercentagefallinthepriceofmanufacturing,sothattherealwageoflaborintermsofmanufacturedgoodsgoesup.Answer:Asseeninthediagram,boththepriceofmanufacturedgoodsandthewagesde-crease.Thekeytothisexerciseistorealizethattheverticaldistanceofthede-creaseinwageislessthantheverticaldistanceofPMMPLM.Therefore:PMMPLMWS-20Solutions■Chapter3GainsandLossesfromTradeintheSpecific-FactorsModelWageWWPM·MPLMPM·MPLMPM·MPL0MLM0ALALLLwhereWrepresentsthechangeinwage.Dividingbothsidesbytheinitialwage(W´P´MMPLM):PM/P´MW/W´Thisisthedesiredresult:thepercentagefallinthewageislessthanthepercent-agefallinthepriceofmanufacturing,sothattherealwageoflaborintermsofmanufacturedgoodsgoesup.b.Whathappenstotherealwageoflaborintermsofagriculture?Answer:Becausethewagedecreasesandthepriceofagriculturalgoodsremainsthesame,theamountofagriculturalgoodsthatcanbeboughtbylaborde-creases.Thatis,realwagedecreasesintermsofagriculture.c.Areworkersbetteroff,worseoff,oristheoutcomeambiguous?Answer:Becausetherealwageincreaseswithrespecttomanufacturedgoodsanddecreaseswithrespecttoagriculture,theoutcomewillbeambiguousforworkers.Forsome,whoprefertopurchasealotofagriculture,thepricechangemeansanoveralllossintermsofhowmuchtheycanbuy.Others,whoprefertobuymainlymanufacturedgoods,gainintermsofhowmuchtheycanbuy.5.Usethefollowinginformationtoanswerthequestionsbelow:Manufacturing:SalesrevenuePMQM150PaymentstolaborWLM100PaymentstocapitalRKK50Agriculture:SalesrevenuePAQA150PaymentstolaborWLA50PaymentstolandRTT100Holdingthepriceofmanufacturingconstant,supposetheincreaseinthepriceofagricultureis10%andtheincreaseinthewageis5%.a.Determinetheimpactoftheincreaseinthepriceofagricultureontherentalonlandandtherentaloncapital.Answer:Rentalonlandcanbecalculatedasfollows:RR_TTRR_TT12.5%Recallingthatthepriceofmanufacturingremainedconstant,wegettherentaloncapitalasRK0QMKWLMRRKK_–WWWRKLKMRRKK5%1500010%.(PA/PA)PAQA(W/W)WLARTT10%1505%50%100Solutions■Chapter3GainsandLossesfromTradeintheSpecific-FactorsModelS-21b.Explainwhathashappenedtotherealrentalonlandandtherealrentaloncapital.Answer:Becauseofthe10%increaseinthepriceofagriculture,therealrentalonlandrosewhereastherealrentaloncapitalfell.Therefore,landownersarebet-teroffbecausethepercentageincreaseintherentalonlandisgreaterthanthepercentageincreaseinthepriceofagriculture,whereasthepriceofmanufactureisconstant.Capitalownersareworseoffintermsoftheirabilitytopurchasebothmanufactureandagriculturebecausetherentaltocapitalhasfallen.RK/RK 0 W/W PA/PA RT/RT,foranincreaseinPA6.If,insteadofthesituationg