ECN 607 - Seminar in Int'l Trade
Prof. Bruce Blonigen

1) Prove that when the international relative price is different from the country's autarky relative price in the Ricardian model there will be complete specialization (in production) into one of the two goods. For notation, express each sector's profit in the country as:

Specifically, assume that the international relative price of good 1 is greater than the autarky relative price of good 1 (in other words, p₁ / p₂ > a₂ / a₁) and show that specialization in good 1 is the only equilibrium where Profit_i <= 0 for i = 1,2. Remember that Profit_i < 0 implies y_i = 0.

2) Explain and graph why the assumption of no factor intensity reversal (FIR) is so important for the factor price equalization theorem in the Heckscher-Ohlin model. Master's students: Show a FIR using a diagram of the zero profit conditions for each sector in (w,r) space. PhD students: In a two sector model, with good 2 initially capital intensive, show a FIR with a production possibilities frontier (PPF) diagram. Hint: Use the Rybczynski theorem to show what happens in the diagram as the country gets successive increases in capital with labor fixed.

3) In a sector-specific model, assume that labor is specific to sector 1, land is specific to sector 2, and capital is a mobile factor. Show what happens to the real return of all 3 factors when the relative goods price of sector 1 increases. Briefly, how does this compare to the Stolper-Samuelson theorem in a two sector Heckscher-Ohlin model where sector 1 is capital abundant and the relative goods price of sector 1 increases?

4) "The Hummels and Levinsohn paper shows why the new trade theory (Krugman's monopolisitic competition model) explains real world trade flows better than traditional (Heckscher-Ohlin) trade theory." Explain whether you agree with this statement. PhD students: Explain why it is important that Hummels and Levinsohn have a time series dimension to their panel data when they control for fixed effects.