Problem Set 4: Free Movement of Capital and Labor

Transcription

1 EO 6331: International Trade all 2018 Thomas Osang Due Thursday, October 25, 2018 Problem Set 4: ree Movement of apital and Labor Part I: ree International Labor Movement (Ricardian Model) onsider two countries (hereafter called the home and the foreign country) whose representative consumers have the following preferences, as represented by the utility they receive from consuming food and clothing: U(, ) = 2 3 ; U (, ) = 4 5. In each country, the available technology allows production of two goods, food and clothing. The home country needs three units of labor to produce a unit of clothing and four units to produce a unit of food. The foreign country needs six units of labor to produce a unit of clothing and four labor units to produce a unit of food. The home country is endowed with 120 units of labor, while the foreign country is endowed with 200 units of labor. 1. Determine the pattern of trade with free trade. 2. Assuming complete specialization in trade, determine free trade production of clothing and food in each country. 3. alculate the free trade equilibrium price ratio between clothing and food as well as free trade consumption of clothing and food for both countries. 4. or each country, calculate exports and imports. 5. Determine the free trade real wage rates in both countries. 6. Write your answers in Table 1 below. 1

2 7. Next, assume that free migration is allowed between the two countries, in addition to free trade. alculate the free migration price ratio as well as the free migration real wage rate, (w/p ) T M, for each country. 8. alculate the number of migrant workers that move from one country to another as well as the free migration production and consumption levels of both clothing and food in each country. 9. Determine the size of the labor force with free migration in each country. 10. alculate exports and imports for each country with free migration. 11. Write your answers in Table 2 below. 12. Which country is the recipient of migrants? Why? 2

3 Part II: ree International apital Movement (Specific-actors Model) onsider a small economy producing two goods, clothing and food. The clothing industry uses capital (K) and labor (L ) as inputs, while the food industry uses land (La) and labor (L ) as factors of production. The production technologies for the two industries are given by Q = K L 4 ; Q = La L 2 Also, the country is endowed with 216 units of capital, 360 units of labor, and 9 units of land. inally, the utility function of the representative consumer is given by U(, ) = Starting from the free trade equilibrium that you derived for the above model in Problem Set 3, introduce free capital flows to the model. In particular, assume that the small open economy can borrow or lend capital to and from the international capital market at the fixed real interest rate, ( r p ), of Determine L, L and the amount of capital used in production of clothing with free trade plus free capital flows. 2. alculate production and consumption levels in the free trade and capital flows equilibrium. 3. alculate the real wage rate ( w p ) and the real rental rate ( i p ) with free trade and capital flows. 4. Derive the real value of production in the free trade plus capital flow equilibrium. 5. alculate real total factor income with free trade and capital flows. Is it equal to the real value of production? If yes, why? If not, why not? 6. Write your answers in Table 3 below. 3

4 Table 1: ree Trade Equilibrium Variable Home ountry oreign ountry Q T Q T ( P ) T T T X T X T M T M T ( w ) T ( w ) T 4

5 Table 2: ree Trade and Migration Equilibrium Variable Home ountry oreign ountry ( P ) T M ( w ) T M ( w ) T M M T M L T M L T M Q T M Q T M T M T M X T M X T M M T M M T M 5

6 Table 3: ree Trade plus ree apital lows Equilibrium Variable ( P ) T - given.6667 L T L T K T Q T Q T T T Real Value of Production (real GDP) ( w ) T Home ountry ( r ) T - given 0.1 ( i ) T Real actor Income (w/ foreign returns) Real actor Income (w/o foreign returns) 6