Consider an international economy consisting of USA and China. There are two factors: capital (K) and labor (L) and two goods: manufacture(M) and food (F): The two countries share the same constant returns to scale production functions. Representative consumers of the two countries share the same homothetic welfare functions with usual properties. At autarky (before trade) and after trade opens, both countries produce both goods. All the prices are in terms of units of food. Thus, the price of food is 1: The USA is capital abundant: Here, L and K are USA endowments of labor and capital and Land Kare Chinese endowments of labor and capital. Assume that food industry is capital intensive and manufacturing is labor intensive. All markets are competitive. (a) Define the following terms: manufacture industry is labor intensive. (b) Draw how the relative supply curves of USA and China might look like and explain their relative positions using the Rybczynski theorem. Use PM/PFon the vertical axis and M/F on the horizontal axis. PF F (c) Now, draw in the common relative demand curve on the graph in(b) : Explain using the graphs, which country has the higher autarky price of manufactures (in terms of food)?
Consider an international economy consisting of USA and China. There are two factors: capital (K) and labor (L) and two goods: manufacture(M) and food (F): The two countries share the same constant returns to scale production functions. Representative consumers of the two countries share the same homothetic welfare functions with usual properties. At autarky (before trade) and after trade opens, both countries produce both goods. All the prices are in terms of units of food. Thus, the price of food is 1: The USA is capital abundant: Here, L and K are USA endowments of labor and capital and Land Kare Chinese endowments of labor and capital. Assume that food industry is capital intensive and manufacturing is labor intensive. All markets are competitive.
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(a) Define the following terms: manufacture industry is labor intensive.
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(b) Draw how the relative supply curves of USA and China might look
like and explain their relative positions using the Rybczynski theorem. Use PM/PFon the vertical axis and M/F on the horizontal axis.
PF F
(c) Now, draw in the common relative demand curve on the graph in(b) : Explain using the graphs, which country has the higher autarky price of manufactures (in terms of food)?
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