A different way to explain which is the capital- and which is the labor intensive good is to look at the Learner diagram in the excel simulation. Below the Learner diagram for our case. From this diagram we can directly observe the capital- and labor intensive goods. The intersections of the unit value assonants of manufactures and food with the unit value cost line show us that manufactures is the capital intensive and food is the labor intensive good. The intersection of the manufactures Squanto is at a relatively high capital level compared to labor and the other way around for the food Squanto intersection.
Furthermore, the shape of the unit value assonants show us that food is more labor intensive than manufactures, for it has a much steeper Squanto. 5. B The Learner diagram pictures the unit value assonants of manufactures and food. Why is the production of manufactures and food not equal to unity? The production of food and manufactures is made up from a certain amount of labor and capital in the intersection of the assonants with the unit value cost line.
The production of manufactures and food is not equal to unity, for the assonants of both products intersect the unit value cost line at a different point.
In other words, the capital and labor intensiveness of the goods differ and therefore the intersection points are at different points at the unit value cost line. Hence the production of food and manufactures is not equal to unity. 5. C If you increase the wage rate, what happens to the prices of manufactures and food? What happens to the labor input and capital input? Explain. Below: On the left the initial case and on the right the case for a wage rate of 0. 4 instead of 0. 2. An increase in the wage rate will have an effect on the production and price of manufactures and food.
However, the effect will be substantially greater in the food industry, for this industry is the labor intensive one. As can be seen from the above tables, the labor input will halve in both the manufactures industry and the food industry. The result will be more severe in the labor intensive food industry, which is shown by the relatively big decrease in production of food (compared to manufactures) and the relatively higher price (compared to manufactures). Capital input does not change in this case, which might seem awkward, because it is now relatively cheap compared to labor.
However, in this emulation the labor input halves in both sectors and the capital input remains unchanged. This is due to the fact that the unit value cost line becomes steeper and steeper, because the rental rate remains unchanged and the wage rate is increasing. Hence the w/r ratio increases, which makes the unit value cost line steeper. 5. AD Fill in the table below by changing the wage rate in the simulation while keeping the rental rate equal to 0. 2. Comment on the evolution of the final goods prices and factor inputs. Wage rate 0. 1 0. 2 0. 3 0. 4 0. 5 0. 6 0. 7 0. 8 0. Price manufactures 0. 29 0. 33 0. 36 0. 38 0. 40 0. 1 0. 42 0. 44 0. 45 Price food 0. 19 0. 46 0. 57 0. 69 0. 79 0. 90 1 . 00 1. 10 Labor input man. 2. 00 0. 67 0. 50 0. 25 0. 22 Capital input man. 4. 00 The model does not change the capital input, hence only the labor input and the prices change. This is due to the fact that the unit value cost line becomes steeper and steeper, because the rental rate stays the same and the wage rate increases. The price of food increases enormously along with the wage rate, for it uses relatively much of the more and more expensive labor.
The price for manufactures increases as well along with the wage rate, but at a much lower ate, for it makes relatively little use of the more and more expensive labor. Question 5. 8 We will again analyze the Learner diagram. Instead of deriving final goods prices from factor prices, the simulation of question 5. 8 derives factor prices from final goods prices, as in the Stopper-Samuelsson proposition. Initially, we assume am = 0. 8, 2. 0 , pm =0. 3 , and if=0. 3. 5. AAA Increase the price of manufactures in the simulation. What happens to the wage rate and rental rate?
What happens to the factor inputs? Explain. Below the Baseline case and the simulation for an increased manufactures price of 0. 5. As we can see from the above table, the wage rate will decrease and the rental rate will increase as an effect of the higher price for manufactures. Furthermore the food and manufactures industry now both use less capital and more labor as a result of the increase in the rental rate. Nevertheless, the production of manufactures drops due to the higher price and the production of food remains unchanged.
To explain all this changes we have to analyses our simulation from the beginning. First of all the price of manufactures increases from 0. 3 to 0. 5. This leads to an increase in the rental rate, as the manufactures production recess is capital intensive. Subsequently both industries move away from the expensive capital to the relatively cheap labor, wage rate drops slightly. Hence, both sectors use more labor and less capital. The production of food stays as before and the production of manufactures drops as a result of the higher price for manufactures.
To quote the Stopper-Samuelsson theory: “A rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor. ” 5. B Fill in the table below by changing the price of manufactures while keeping the price of food stable at 0. 3. Comment on the development of the factor prices and factor inputs. Price of man. 0. 26 0. 21 0. 18 0. 17 0. 15 0. 14 0. 13 Rental rate 0. 04 0. 11 0. 27 0. 56 0. 76 0. 96 1. 30 1 . 39 1 . 46 1 . 52 1. 59 19. 03 7. 55 4. 40 3. 00 2. 23 1. 75 1. 2 1. 19 1 . 02 First of all the price an increase in the price of manufactures leads to an increase in the rental rate, as the manufactures production process is capital intensive. Subsequently both industries move away from the expensive capital o the relatively cheap labor, wage rate drops slightly. Hence, both sectors use more labor and less capital. The production of food stays as before and the production of manufactures drops as a result of the higher price for manufactures. Question 7. 8 Different boxes throughout part II have summarized the type of products exported by different countries.
The question arises if these export patterns are in accordance with the Hecklers-Olin proposition. The dateable of question 7. 8 contains the export data presented in the main text. On the website of the World Bank (www. Workloads. Org) you can find a database called “The world placement indicators”. This database offers a wide variety of statistics. Select a number of statistics that may tell you something about the factor endowment of different countries. Confront this data with the export statistics and tell whether the Hecklers-Olin proposition holds.
The Hecklers-Olin proposition is that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively. In this two-factor case, a capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor- intensive good. From the huge variety of statistics offered in the database from the World Bank, we will choose one statistic to compare with each of the exports’ main input factors presented in the excel file of this question.
The main input factors are these: The statistic from the World Bank used: Primary products Food exports (% of merchandise exports) Natural resource intensive products Ores and metals exports (% of merchandise exports) Unskilled labor intensive products Manufactures exports (% of merchandise exports) Technology intensive products High-technology exports 96 of manufactured exports) Human capital intensive products Insurance and financial services (% of commercial service exports) To conduct the experiment well pick a five countries, one for each input factor.
The countries chosen are: Argentina, exports relatively much primary products. Zambia, exports relatively much natural resource intensive products. China, exports relatively much unskilled labor intensive products. Japan, exports relatively much technology intensive products. Canada, exports relatively much human capital intensive products. The table below shows the exports of the abovementioned countries.
Exports classified by main input factors (1998) Natural-resource intensive products Unskilled-labor intensive products Technology intensive products Human-capital intensive products US$ mill. Argentina 15406 1320 714 2435 4685 Zambia 125 347 9 5 China 19846 7203 78382 49213 28203 Japan 5386 7841 24870 211697 125070 Canada 49491 1 5336 12694 50340 72269 For the ease of explaining this problem we’ll use only data of year 2010, except for Insurance and financial services we use 2009 data, as 2010 data is not available for every country.
The table below shows the Food exports (% of merchandise exports), Ores ND metals exports (% of merchandise exports), Manufactures exports (% of merchandise exports), High-technology exports (% of manufactured exports), and Insurance and financial services (% of commercial service exports) for the selected countries. In the High technology exports we expected Japan to have the highest value while China obviously has a much higher value there. This can be due to the fact that we underestimated China in this sector or the more likely explanation that Japan just exports more manufactured goods.
In the Ores and metals exports (% of merchandise exports) we expected Zambia o have the highest value, for Zambia exports relatively much Natural resource intensive products. Our expectation came true, since Zambia has a much higher value than the other countries in this sector. In the Manufactures exports (% of merchandise exports) we expected China to have the highest value, as China exports relatively much unskilled labor intensive products.
China does have the highest value of all, however Japan is close to China. This can be explained by the fact that not all manufactures can be produced by unskilled labor and that the merchandise exports are different in China and Japan. In Insurance and financial services (% of commercial service exports) Canada was ought to have the highest value, because Canada exports relatively much Human capital intensive goods. As can be seen below Canada did have the highest value and our expectation therefore came true.
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