ECON254 ASSIGNMENT 5 – What happens to real returns

Subject: Economics    / General Economics
Question
ECON254 General Equilibrium MODEL
1: BRUNEAU ASSIGNMENT #5 DUE: (10 points) SF MODEL: Suppose we have two sectors: MANU and AG. Capital is specific
to MANU and Land specific to AG. Labour is mobile. Prices are given. (3 points) a) What happens to real returns to labour, owners of capital, and owners of land if the price of AG
rises by 10%. Will real wages rise? Will owners of capital be better off? Owners of Land?
Show and explain.
(3 points) b) What happens to real returns to labour, owners of capital, and owners of land if the productivity
in AG rises by 10%? Will real wages rise? Will owners of capital be better off? Owners of
Land? Show and explain.
(3 points) c) What happens to real returns to labour, owners of capital, and owners of land if the quantity of
land used in AG rises by 10%? Will real wages rise? Will owners of capital be better off?
Owners of Land? Show and explain.
(1 point) d) What happens to real returns to labour, owners of capital, and owners of land if the price of AG
rises by 10% and the price of MANU rises by 10%. Will real wages rise? Will owners of
capital be better off? Owners of Land? Show and explain.
2: (10 points) Autarchy versus Free Trade: Suppose Home and Foreign have identical
endowments and technologies but Home has demand biased towards MANU. (2 points) a) Depict this in the ‘standard model of trade’ as per class notes. Explain why relative demands
will differ and how.
(2 points) b) Compare prices, production and consumption in each country in autarchy?
(4 points) c) What happens to prices production and consumption in each country when we open to free
trade? Who exports AG? Who exports MANU? Explain.
(2 points) d) Do we get Gains from Trade? Who gains? Do some lose? Explain. Give the intuition.
3: (10 points) Autarchy versus Free Trade: Suppose Home and Foreign have identical
preferences but Home has more land (T) than foreign. Otherwise, they have the same labour
and capital endowment. 2 points) a) Depict this in the ‘standard model of trade’ as per class notes. Explain why relative demands will
differ and how.
(2 points) b) Compare prices, production and consumption in each country in autarchy?
(4 points) c) What happens to prices production and consumption in each country when we open to free
trade? Who exports AG? Who exports MANU? Explain.
(2 points) d) Do we get Gains from Trade? Who gains? Do some lose? Explain. Give the intuition.
30 POINTS