12

1. State the Heckscher-Ohlin Theorem.
2. Suppose there are two countries, USA and Germany. USA is regarded as the home country and Germany is the foreign country. USA has 100 units of labor available and Germany has 80 units of labor. Both countries can produce only two goods, airplanes and cars. The output per hour of labor in the production of airplanes in the USA is 12, while in car production the output per hour of labor is 6. In Germany, the output per hour of labor in the production of airplanes is 2 and the output per hour of labor in the production of cars is 2. Using the Ricardian model,

1. Construct a graph of the United States production possibility frontier (use the vertical axis to represent airplanes and the horizontal axis to represent cars).
2. Construct a graph of Germany’s production possibility frontier.
3. Suppose the mutually beneficial terms of trade between USA and Germany is 1 airplane for ¾ car, draw the consumption possibility frontier for USA by superimposing it on the graph you constructed in (i) above.
4. Using the inverse of the marginal product of labor, construct a table of the unit labor requirement?
5. Derive the opportunity cost for both USA and Germany for both goods using the unit labor requirement table that you obtained in (iv) above. (5 points)
6. Based on your results, determine which country should export airplane or cars.

Question 13

1. Why is the overall cost of living in China lower than in Europe, the United States and Canada? (7 points)

2. Despite major gains, Chinese manufacturing workers have much lower productivity than their U.S counterparts. Chinese service workers are relatively more productive, but most services aren't tradable. So, which matters for Chinese wages-manufacturing or service productivity?
3. Mexico and Brazil have different trading partners. While Mexico trades mainly with the United States, Brazil trades about equally with the United States and with the EU (European Union). In addition, Mexico does much more trade relative to its GDP. Explain these differences using the gravity model of trade.
4. Explain clearly the analogy between international borrowing and lending and ordinary international trade.