Use the following setup for problems 6 and 7: There are two factors of productio
ID: 2441943 • Letter: U
Question
Use the following setup for problems 6 and 7: There are two factors of production (cars and (capital and labor), two goods cloth), and two countries (Krugland and Helpland). Both factors are used in the production of each good, but car production is relatively capital intensive and cloth production is relatively labor intensive. Krugland is relatively capital abundant and Helpland is relatively labor abundant. 6. Assume Krugland is a small country. Suppose the capital stock of Krugland miraculously doubles but its labor endowment doesn't change. a. Will Krugland's output of cars increase or decrease? Briefly explain. b. Will Krugland's output of cloth increase or decrease? Briefly explain. c. Is Krugland's willingness to trade likely to increase or decrease? Briefly explain. d. Will this result in an improvement or deterioration in Krugland's terms of trade? Briefly explain. Assume Krugland and Helpland are both large countries. Suppose the capital stock of Krugland miraculously doubles but its land endowment doesn't change. a. Will this likely result in an improvement or deterioration in Krugland's terms of trade? Briefly b. Will Krugland necessarily experience an increase in welfare as a result of its increased factor explain. endowment? Briefly explain.Explanation / Answer
Answer:
6-
a. Yes krugland’s output of cars will increase because krugland is a capital abundant country it means capital intensive goods can be produces cheaply there and car is a capital intensive good so the country will produce more car when its capital stock increases.
b.Krugland’s output of cloth will reduce as it will shift labours from cloth to car production as capital stock has increased but the labour supply did not change in the country.
c. Yes Krugland’s willingness to trade will likely to increase as its capital stock has increased so it will produce more cars for export so that it can increase it exports and can easily afford import of cloths.
d. This will lead to improvement in the terms of trade of Krugland as its exports will increase and terms of trade will become positive.
7-
a. Yes it will lead to improvement in terms of trade as the export of cars will increase. the stock of capital has increased and car is a capital intensive good so the production will increase whcih will increase export of cars.
b. Yes it will experience increase in welfare as terms of trade will increase and the currency inflow will increase which will lead to appreciation in the value of currency.