2, (80 points) Consider the following two-sector economies, A and B with linear production tecimology. For comntry A, the consumption paths that show the relative demand for one Of the sectors’ production in terms of the production of otlier for each of the countries are given as QWr=As & Wy= Wi, where Qf, is the quantity of good 1 demanded by all eonsurners im country A. Other quantity variables are definod sitnilarly, Labor is the only factor of production. Total labor supply in each of the countries is 200 units. Production technologies as given by the following supply ‘production funetions, QaaOlia & Baa Blra ie Bho & Oy 2ap. where Qi, fs the quantity of good 1 produced by E3,4 many workers from country A who work in sector 1, Other quantity variables are defined similarly. Assuine that the labor is perfectly mobile between the industries. Productivity of labor at industry 1 in country A is given by the parameter @ > 0. Answer the following questions. (a) Consider the Sautarky” scenario; that is, suppose that there is no trade between coun- tries and so both economies are closed. Find the equilibrinm allocation of labor and quantity among, the sectors for both countries as functions of 8. (b) Calculate GI How does GDP change with 8? Provide some intuition DP of country A using all three approaches and explain your calculations, (0) For which values of @ docs country A have comparative advantage in good 2? (d) Suppose that the countries open up to trade at the relative price ft = 1. Suppose that # satisfy the condition you found in the previous part and that the relative price of good 2 is less than 1 Assume that country A fully specializes in the production of good 2 after opening up to trace; that is, it uses all of its resources to produce good 2. Find the quantities traded, produced and consumed in country A along with the labor market allocation.3. (10 points) An investor considers investing in one of the two entrepreneurs, whose business plans lead to the following expectod outcomes. A domestic entrepreneur with the following outcomes and the corresponding probabil ities. % Gain or Loss | Probability «A foreign entrepreneur with the following outcomes and the corresponding probabili- ties. % Gain or Loss | Probability 0% 05 25% 0.25 40% 0.25 ‘The exchange rate Eyre between the local and forvign earrency might change by the time ‘the outcomes of the investment realizes. Local currency might appreciate against the foreign currency by 10% with 04 probability, and depreciate 20% with the remaining probability Assume that the exchange rate fluctuations are independent of the entrepreneurs’ invest- Calculate and compare the real rates of returns for cach of the investment options assuring that the expected inflation rate is 3%4. (15 points) Consider two economies 1 and 2, Assume that the financial capital is perfectly mobile between the financial markets of both economies. Let ¥\ and ¥; be the ageregute income in economies 1 and 2 The following information about the economies is given Country L Country 2 Augregate Consumption 2000) 1000 Augiegate Tnvestinent T= 350 T= 100 ‘Government Expenditures Gi — 300 G2 = 200 Net Exports XM = 50 | Xp — My = 100 Money Demand, M2/P Yi = 10000, | 2¥2 — 100002 Nominal Money Supply, 710000 5000 Price level, P 4 2 Suppose that expected exchange rate is given as Ey Suppese that some news about country 2 arrive. According to the news, a significant increase in the investment is expected in country 2 the next year (but not now) Which variables would be immediately affected by the arrival of these news? Provide fa graphical analysis to illustrate the macroeconomic impact of this announcement. In your analysis, make a distinction between short run and medium-ran where some prices are flexible. 5, (15 points) Consider two countries, Home and Foreign, with two industries, electronies and textiles, and two factors of production, low-skilled labor and high-skilled labor. Suppose that Home country is (relatively) abundant in high-skilled labor, electronies uses high- skilled labor relatively hold. ure intensely, sind the assumptions of the Heckscher-Ohlin model (a) Provide a graphical illustration of competitive equilibria before and after trade, and the potential gains from international trade using production possibilities frontiers. () Suppose that a major immigration flow into the Home country makes it relatively abundant: in Jow-skilled labor compared to the Foreign country. Provide a graphical illustration of the potential changes in the before and after trade equilibria. Can you provide any recent or historical example of a country that experienced some thing similar?