Question

Engineering Economics

1. This question is about changes in technology and the effect it has on the terms of trade. This economy consists of three countries; United States, Mexico, and Canada. Each country can produce two goods, an agricultural good and a manufacturing good. Production functions are constant returns to scale in labor.

a_{a}^{\operatorname{con}}=1, a_{m}^{\operatorname{con}}=5

a_{a}^{\text {usa }}=1, a_{m}^{\text {usa }}=1

a_{a}^{m e x}=1, a_{m}^{m e x}=2

The labor forces in each country,

L^{\text {usa }}=300, L^{\text {mex }}=100, L^{\text {can }}=25

a. [9 pts] Draw the PPF for each country in autarky. Clearly label the x and y intercepts and the slope.

b. [6 pts] What is the relative price of manufacturing to agriculture in each country in au-tark?

[10 pts] Suppose the countries open up to trade, draw the relative supply.curve.

d. [15 pts] Let the relative global demand curve be given by,

\frac{P_{a}^{w}}{P_{m}^{w}}=\frac{1}{4} \frac{1}{\frac{Q_{a}}{Q_{m}}}

What is the equilibrium relative price of manufactured goods to agricultural goods?

e. [10 pts] Suppose there is an improvement in manufacturing technology in Mexico, and the unit labor requirement falls from 2 to 1. Draw the new relative supply curve. How does this change affect the terms of trade? Who wins and who looses? Explain your answer.


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