This  assignment relates to the Heckscher-Ohlin (HO) model. Carefully follow the guidelines below:

• You must answer ALL questions.
• For mathematical questions, show the intermediate steps that lead you to your final results.
• Don’t overload a diagram. If there is too much content on one chart, do not hesitate to use a new one.
• You should use all resources from this class to complete your homework (notes, slideshow, textbook).

The Heckscher-Ohlin (HO) Model

Consider a Heckscher-Ohlin (HO) model in which the two countries are the US and Colombia. For the sake of simplicity, assume the US is the home country. The two factors of production are labor and capital. Workers and capital owners receive earnings W and R, respec­tively. Factor earnings are denominated in US dollars (\$).

In this economy, two goods are produced: smartphones (S) and coffee (C). We assume that the US is abun­dant in capital and Colombia is abundant in labor.

Finally, we assume that technologies in both countries are identical and that the production of smartphones is capital intensive while that of coffee are labor intensive.

1. What does factor abundance mean for a country? Does it mean that Colombia has a workforce larger than that of the US?
2. Describe the meaning of the assumption: smartphones are capital intensive while coffee is labor intensive. Draw on the same chart isoquants for the US production of smartphones and that of coffee. (Note that these will be the same for Colombia as we assume identical technologies). Recall that isoquants represent all combinations of factors of production used for a given level of production. Add on this diagram the cost constraints (or cost functions) which are tangent to the isoquants. What is the slope of the cost constraint? On this chart, use labor on the X-axis and capital on the Y-axis.
3. Let us first assume that both economies are closed.
4. On a diagram, draw the production possibility frontier (PPF) of the US. Show point A, i.e., the no-trade equilibrium, by adding the highest community indifference curve that can be reached in the US. On this chart, use the quantity of coffee on the X-axis and the quantity of smartphones on the Y-axis. You do not have to give any specific quantities.
5. On a different diagram, display the PPF of Colombia and the no-trade equilibrium, point A*.

: quantity of smartphones produced in the US

: quantity of coffee produced in the US

: quantity of smartphones consumed in the US

: quantity of coffee consumed in in the US

: price of smartphones in the US (in \$)

: price of coffee in the US (in \$)

: quantity of smartphones produced in Colombia

: quantity of coffee produced in Colombia

: quantity of smartphones consumed in Colombia

: quantity of coffee consumed in Colombia

: price of smartphones in Colombia (in \$)

: price of coffee in Colombia (in \$)

1. Compare the relative price of coffee in the US and Colombia. Explain.

1. Let us assume now that both countries open up to trade. Prices of coffee () and smartphones () are determined on international markets. Let us assume that:

1. If there is free trade between the US and Colombia, how will the two countries specialize (which country will export which good)? Explain.
2. On a new diagram similar to that used in question 3, draw point B, i.e., the new equilibrium for production, and point C, i.e., the free trade equilibrium in the US. On the chart, show exports and imports.
3. On this chart, highlight the trade triangle.
4. What is the factor that determines trade patterns in the HO model?
5. Does trade generate welfare gains at the aggregate level?
6. On a new diagram, plot the export supply and import demand for coffee. Be sure to indicate the vertical intercepts of both curves and which country is associated with each curve. On this diagram, use the quantity of coffee on the X-axis and relative price of coffee on the Y-axis.

1. Let us concentrate on the distributional effects of trade in the US.
2. Draw the curves representing the relative demand for labor in each industry (and ) as well as the relative demand for labor (RD) economy wide.

On this chart, use the ratio   (i.e., the ratio of unskilled workers to skilled workers) on the X-axis and the ratio  (i.e., the wage-rental ratio) on the Y-axis.

HINT: recall the equation that equalizes relative supply and relative demand:

1. On this chart, show the wage-rental ratio at the equilibrium in autarky. Show the factor intensity (i.e., the labor to capital ratio) for each industry in autarky.
2. On the same chart, highlight the change in relative demand for labor economy wide once the US opens up to trade. What happens to the wage-rental ratio? How is the factor intensity (i.e., the labor to capital ratio) affected in each sector?
3. Describe how real wages for workers and capital owners are affected by trade in the US. Who is better off? Who is worse off?
4. In your opinion, will income distribution be more equal or more unequal in the US following trade liberalization? What about in Colombia? To answer this question, apply the Stolper-Samuelson theorem. For simplicity, you may assume that increases (while  remains constant) in the US and that  decreases (while  remains constant) in Colombia.

This third assignment relates to the Heckscher-Ohlin (HO) model. Carefully follow the guidelines below:

• You must answer ALL questions.
• For mathematical questions, show the intermediate steps that lead you to your final results.
• Don’t overload a diagram. If there is too much content on one chart, do not hesitate to use a new one.
• You should use all resources from this class to complete your homework (notes, slideshow, textbook).

The Heckscher-Ohlin (HO) Model

Consider a Heckscher-Ohlin (HO) model in which the two countries are the US and Colombia. For the sake of simplicity, assume the US is the home country. The two factors of production are labor and capital. Workers and capital owners receive earnings W and R, respec­tively. Factor earnings are denominated in US dollars (\$).

In this economy, two goods are produced: smartphones (S) and coffee (C). We assume that the US is abun­dant in capital and Colombia is abundant in labor.

Finally, we assume that technologies in both countries are identical and that the production of smartphones is capital intensive while that of coffee are labor intensive.

1. What does factor abundance mean for a country? Does it mean that Colombia has a workforce larger than that of the US?
2. Describe the meaning of the assumption: smartphones are capital intensive while coffee is labor intensive. Draw on the same chart isoquants for the US production of smartphones and that of coffee. (Note that these will be the same for Colombia as we assume identical technologies). Recall that isoquants represent all combinations of factors of production used for a given level of production. Add on this diagram the cost constraints (or cost functions) which are tangent to the isoquants. What is the slope of the cost constraint? On this chart, use labor on the X-axis and capital on the Y-axis.
3. Let us first assume that both economies are closed.
4. On a diagram, draw the production possibility frontier (PPF) of the US. Show point A, i.e., the no-trade equilibrium, by adding the highest community indifference curve that can be reached in the US. On this chart, use the quantity of coffee on the X-axis and the quantity of smartphones on the Y-axis. You do not have to give any specific quantities.
5. On a different diagram, display the PPF of Colombia and the no-trade equilibrium, point A*.

: quantity of smartphones produced in the US

: quantity of coffee produced in the US

: quantity of smartphones consumed in the US

: quantity of coffee consumed in in the US

: price of smartphones in the US (in \$)

: price of coffee in the US (in \$)

: quantity of smartphones produced in Colombia

: quantity of coffee produced in Colombia

: quantity of smartphones consumed in Colombia

: quantity of coffee consumed in Colombia

: price of smartphones in Colombia (in \$)

: price of coffee in Colombia (in \$)

1. Compare the relative price of coffee in the US and Colombia. Explain.

1. Let us assume now that both countries open up to trade. Prices of coffee () and smartphones () are determined on international markets. Let us assume that:

1. If there is free trade between the US and Colombia, how will the two countries specialize (which country will export which good)? Explain.
2. On a new diagram similar to that used in question 3, draw point B, i.e., the new equilibrium for production, and point C, i.e., the free trade equilibrium in the US. On the chart, show exports and imports.
3. On this chart, highlight the trade triangle.
4. What is the factor that determines trade patterns in the HO model?
5. Does trade generate welfare gains at the aggregate level?
6. On a new diagram, plot the export supply and import demand for coffee. Be sure to indicate the vertical intercepts of both curves and which country is associated with each curve. On this diagram, use the quantity of coffee on the X-axis and relative price of coffee on the Y-axis.

1. Let us concentrate on the distributional effects of trade in the US.
2. Draw the curves representing the relative demand for labor in each industry (and ) as well as the relative demand for labor (RD) economy wide.

On this chart, use the ratio   (i.e., the ratio of unskilled workers to skilled workers) on the X-axis and the ratio  (i.e., the wage-rental ratio) on the Y-axis.

HINT: recall the equation that equalizes relative supply and relative demand:

1. On this chart, show the wage-rental ratio at the equilibrium in autarky. Show the factor intensity (i.e., the labor to capital ratio) for each industry in autarky.
2. On the same chart, highlight the change in relative demand for labor economy wide once the US opens up to trade. What happens to the wage-rental ratio? How is the factor intensity (i.e., the labor to capital ratio) affected in each sector?
3. Describe how real wages for workers and capital owners are affected by trade in the US. Who is better off? Who is worse off?
4. In your opinion, will income distribution be more equal or more unequal in the US following trade liberalization? What about in Colombia? To answer this question, apply the Stolper-Samuelson theorem. For simplicity, you may assume that increases (while  remains constant) in the US and that  decreases (while  remains constant) in Colombia.