1、S-193U1 U2ABCOutput of manufacturing,QMOutput of agriculture,QAAs seen in the previous diagram,a fall in the relative price of manufactures isshown by the smaller slope（in absolute value）of the international price line.Thecountry produces at point B,at which the international price line intersects i
2、tsPPF.The higher relative price of agriculture attracts workers into that sectorsuch that the output of agriculture increases and the output of manufacturedgoods decreases.Now the highest level of utility is achieved where the highestpossible indifference curve intersects with the new price line（at
3、C）.The increasein utility signified by the higher indifference curve is a measure of gains fromtrade.b.Which good is exported and which is imported?The decrease in the relative price of manufactures in the trade equilib-rium（compared with autarky）also means that the country is importing manu-facture
4、d goods and exporting agricultural goods.c.Explain why the overall gains from trade are still positive.Answer:Overall gains from trade are still positive because the country is able tosell agriculture at a higher price and buy manufactured goods at a lower pricethan it could have in autarky.The fact
5、 that the relative price（of manufacturedgoods）fell with trade indicates that the foreign countrys autarky relative pricewas lower.That is,in this case the country has a comparative advantage in agri-culture.In Figure 3-4,the case illustrated is one in which the country has a com-parative advantage i
6、n manufacturing goods and thus their export leads to an in-crease in their relative price.4.Starting from equilibrium in the specific-factors model,suppose the price of manu-factured goods falls so that wages fall from W?to W in Figure 3-5.a.Show that the percentage fall in wages is less than the pe
7、rcentage fall in the priceof manufacturing,so that the real wage of labor in terms of manufactured goodsgoes up.Answer:As seen in the diagram,both the price of manufactured goods and the wages de-crease.The key to this exercise is to realize that the vertical distance of the de-crease in wage is les
8、s than the vertical distance of?PM?MPLM.Therefore:?MPLM?WS-20Solutions Chapter 3 Gains and Losses from Trade in the Specific-Factors ModelWageWW?PM MPLMPM?MPLMPM MPL 0MLM0ALALL?L?where?W represents the change in wage.Dividing both sides by the initialwage（W?MPLM）:PM/PM?W/WThis is the desired result:
9、the percentage fall in the wage is less than the percent-age fall in the price of manufacturing,so that the real wage of labor in terms ofmanufactured goods goes up.b.What happens to the real wage of labor in terms of agriculture?Because the wage decreases and the price of agricultural goods remains
10、the same,the amount of agricultural goods that can be bought by labor de-creases.That is,real wage decreases in terms of agriculture.c.Are workers better off,worse off,or is the outcome ambiguous?Because the real wage increases with respect to manufactured goodsand decreases with respect to agricult
11、ure,the outcome will be ambiguous forworkers.For some,who prefer to purchase a lot of agriculture,the price changemeans an overall loss in terms of how much they can buy.Others,who preferto buy mainly manufactured goods,gain in terms of how much they can buy.5.Use the following information to answer
12、 the questions below:Manufacturing:Sales revenue?QM?150Payments to labor?W?LM?100Payments to capital?RK?K?50Agriculture:PA?QA?LA?50Payments to land?RT?T?100Holding the price of manufacturing constant,suppose the increase in the price ofagriculture is 10%and the increase in the wage is 5%.a.Determine
13、 the impact of the increase in the price of agriculture on the rental onland and the rental on capital.Answer:Rental on land can be calculated as follows:RR_TT?12.5%Recalling that the price of manufacturing remained constant,we get the rentalon capital as?0?RRKK?_?WW?WRK?LKM?5%?15000?10%.（?PA/PA）?（?W/W）?
