Consider the Heckscher-Ohlin model. The relationships among prices and marginal costs of producing cheese and bicycles at home are represented by the equations. Show work. For rounding purpose, keep two digits after the decimal point. Pc = 15w + 8r, and Pb = w + r, where Pc ≡ the price of cheese, Pb ≡ the price of bicycles, r ≡ the rental rate of capital, and w ≡ the wage rate. a. Which good is the relatively capital intensive good? Why? b. Under autarky, the price of cheese is $239 and the price of a bicycle is $22. What are the equilibrium wage and rental rates? c. With trade, the price of bicycle in the home country rises 20 percent while the price of cheese remains the same. According to the Heckscher-Ohlin theorem, is the home country relatively labor abundant or relatively capital abundant? Why d. What are the equilibrium wage and rental rates after trade at home? e. Using your answers above, explain the Stolper – Samuelson theorem by describing what happens to the real earnings of labor and the real earnings of capital under trade.

Consider the Heckscher-Ohlin model. The relationships among prices and marginal costs of producing cheese and bicycles at home are represented by the equations. Show work. For rounding purpose, keep two digits after the decimal point.

Pc = 15w + 8r, and Pb = w + r,

where Pc ≡ the price of cheese, Pb ≡ the price of bicycles, r ≡ the rental rate of capital, and w ≡ the wage rate.

a.       Which good is the relatively capital intensive good? Why?

b.      Under autarky, the price of cheese is $239 and the price of a bicycle is $22. What are the equilibrium wage and rental rates?

c. With trade, the price of bicycle in the home country rises 20 percent while the price of cheese remains the same. According to the Heckscher-Ohlin theorem, is the home country relatively labor abundant or relatively capital abundant? Why

d. What are the equilibrium wage and rental rates after trade at home?

e. Using your answers above, explain the Stolper – Samuelson theorem by describing what happens to    the real earnings of labor and the real earnings of capital under trade.

 

 

 

Answer:

We have the following price functions

Pc = 15w + 8r, and Pb = w + r,

where Pc ≡ the price of cheese, Pb ≡ the price of bicycles, r ≡ the rental rate of capital, and w ≡ the wage rate.

a. Cheese employs more labor and less capital, hence it is relatively labor intensive good. In this sense, bicycle is a capital intensive good.

b. Under autarky, the price of cheese is $239 and the price of a bicycle is $22, that implies,

15w + 8r = 239

w + r = 22

Solve them to get w* = 9 and r* 13

These are the equilibrium wage and rental rates.

c. With trade, the price of bicycle in the home country rises 20 percent while the price of cheese remains the same. According to the Heckscher-Ohlin theorem, home country relatively labor abundant. This is because a country experiences a rise in the price of a product after exporting, that uses its most abundant factor intensly.

d. A rise in price of bicycle from 239 to 286.8 implies:

15w + 8r = 286.8

w + r = 22

Solve them to get w* = 13.85 and r* = 8.5

e. According to Stolper – Samuelson theorem, the factor that is used intensly in production of exporting good, experiences a rise in price. We can verify that wages are now increased and earnings of capital owners have fallen

 

Asked on February 14, 2018 in economics.
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