Scribd
Upload
16 views2 pages

Trade

The document discusses the production and consumption of goods across two countries. It derives equations to show how relative prices, wages, and productivity affect consumption patterns and overall utility in both countries.

Uploaded by

Yo Tu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
16 views2 pages

Trade

The document discusses the production and consumption of goods across two countries. It derives equations to show how relative prices, wages, and productivity affect consumption patterns and overall utility in both countries.

Uploaded by

Yo Tu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

a) Given that both countries produce strictly positive amounts of good 2, we can infer that the

relative price of good 2 is equalized across countries:

p2 p2
=
ωH ωF

Also, given that both countries use the same utility function and consumers have identical
preferences, the relative prices will be such that:

pn β n
=
ωj βj

for n ∈{1 ,2 , 3 } and j ∈{ H < F }.

ωH
Now, let's calculate :
ωF

ω H p2 w H p 2 β 2
= × = ×
ω F wF p 2 w F β H

b) Since good 2 is produced in both countries, we can express the consumption of good 2 in
both countries as:
LH
C 2 ,H =
l2 , H
LF
C 2 ,F =
l 2 ,F

Given the relative prices and wages, we can determine the consumption of goods 1 and 3 using the
budget constraint:

wj
C n , j= × β n × C 2, j
pn

c) Market clearing conditions imply that the total amount of each good produced equals the
total amount consumed:

L H =l 1, H +l 2 , H +l 3 ,H

LF =l 1 , F +l 2 , F +l 3 , F

Using the relative prices and wages, and the consumption equations derived in part b, we can
express l n , j for each n ∈{1 ,2 , 3 } and j ∈{ H , F }.
d) (i) When z 1 , F increases, the labor productivity in producing good 1 in the foreign country
increases. As a result, the relative cost of good 1 is reduced in relation to other items. As a
result, both countries' consumption of good 1 rises, which could raise both nations' utility
levels.
(ii) When z 2 , F increases, it directly affects the production of good 2 in the foreign country.
This could affect the relative prices and wages, potentially altering consumption patterns
and thus utility in both countries.
(iii) When z 3 , F increases, similar effects as in scenario 1 might occur, affecting the
consumption pattern and utility in both countries.
(iv) When the vector (z 1 , F , z 2 , F , z 3 , F ) is scaled up by a factor γ >1, it uniformly increases
the labor productivities in the foreign country for all goods. This will likely lead to a
decrease in relative prices of goods produced in the foreign country, potentially altering
consumption patterns and utility in both countries.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy