Question 1
There are two industries in Sweden: Telecommunications and Business Services. Compared to its trading partners, Sweden has a comparative advantage in the Business sector. Swedish firms have stocks of capital that are devoted to either telecommunications or business services.
a) Suppose that Sweden is not trading. Draw the specific factors diagram for Sweden, indicating how labor is divided between the two industries and showing equilibrium wage
b) Modify your diagram to show how Sweden’s labor allocation and wage change when it opens to trade with the rest of the world.
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c) How does the opening of trade affect capital owners in Sweden¡¯s business services industry? Describe and show on your graph.
d) Are Swedish workers likely to benefit or lose from the opening of trade? Explain.
e) Suppose Swedish workers spend a lot on telecommunications while buying very few business services. How does this affect the likely magnitude of workers¡¯ gains or losses?
Question 2
In the specific-factors model, assume the price of agricultural goods increases while the price of manufactured goods is unchanged (¦¤PA/ PA < 0 and ¦¤PM/ PM = 0). Assume that land (T) is the specific factor in agriculture, while capital (K) is the specific factor in manufacturing. Similarly, RT is the return to land, while RK is the return to capital. Based on the change in agricultural prices, arrange the terms below in ascending order. Explain your answer.
¦¤RT/RT ¦¤RK/RK ¦¤PA/ PA ¦¤PM/ PM ¦¤W/W
Question 3
The specific factor diagram below represents the Telecommunications (T) and Construction Machinery (C) industries in France.
a) Suppose a move to free trade raises the price of telecommunications in France (PT) by 10%. Show how you modify the diagram and describe how French employment in the construction machinery industry changes (refer to your diagram).
b) Describe the change (gain or loss) in profits earned by French capital owners who own capital in the construction machinery.
c) Suppose that high demand for housing in France led to an increase in the price of construction machinery (PC) by 10%. Compared to the free trade equilibrium, what will happen to employment, wages, and rental returns? Compared to autarky?
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