Monopolistic Competition

  1. Briefly explain what each of the following terms means as described in this chapter.
    1. Trade War
    2. Autarky
    3. Leontief Paradox
    4. Monopolistic Competition
    5. Trade Balance
  1. In this problem you will use the World Development Indicators (WDI) database from the World Bank to compute the comparative advantage of two countries in the major sectors of gross domestic product (GDP): agriculture, industry (which includes manufacturing, mining, construction, electricity, and gas), and services. Go to the WDI website at, and choose “Online tables,” where you will be using the sections on “People” and on the “Economy.”


  1. In the “People” section, start with the table “Labor force structure.” Choose two countries (the U.S and one other country either from Africa or Asia (excluding Japan or South Korea)) that you would like to compare, and for a recent year write down their total labor force (in millions) and the percentage of the labor force that is female. Then calculate the number of the labor force (in millions) who are male and the number who are female.


  1. Again, using the “People” section of the WDI, now go to the “Employment by sector” table. For the same two countries that you chose in part (a) and for roughly the same year, write down the percent of male employment and the percent of female employment in each of the three sectors of GDP: agriculture, industry, and services. (If the data are missing in this table for the countries that you chose in part (a), use different countries.) Use these percentages along with your answer to part (a) to calculate the number of male workers and the number of female workers in each sector. Add together the number of male and female workers to get the total labor force in each sector.


  1. In the “Economy” section, go to the table “Structure of output.” There you will find GDP (in $ billions) and the % of GDP in each of the three sectors: agriculture, industry, and services. For the same two countries and the same year that you chose in part (a), write down their GDP (in $ billions) and the percentage of their GDP accounted for by agriculture, by industry, and by services. Multiply GDP by the percentages to obtain the dollar amount of GDP coming from each of these sectors, which is interpreted as the value-added in each sector, that is, the dollar amount that is sold in each sector minus the cost of materials (not including the cost of labor or capital) used in production.
  2. Using your results from parts (b) and (c), divide the GDP from each sector by the labor force in each sector to obtain the value-added per worker in each sector. Arrange these numbers in the same way as the “Sales/Employee” and “Bushels/Worker” shown in Table 2-2. Then compute the absolute advantage of one country relative to the other in each sector, as shown on the right-hand side of Table 2-2. Interpret your results. Also compute the comparative advantage of agriculture/industry and agriculture/services (as shown at the bottom of Table 2-2), and the comparative advantage of industry/services. Based on your results, what should be the trade pattern of these two countries if they were trading only with each other?


  1. Assume that two countries, Home and Foreign, produce two goods: TVs and cars. Use the information below to answer the following questions:

In the No-Trade equilibrium:

Home Foreign
TV sector Car sector TV sector Car sector
Wage = 8 Wage = ? Wage* = 9 Wage* = 9
MPL = 4 MPL = ? MPL* = ? MPL* = 3
Price = ? Price = 4 P* = 6 P* =  ?








(Hint: remember the link between price ratios and slope of the PPF curve)


  1. What is the marginal product of labor for cars in Home? What is the no- trade relative price of TVs in Home?
  2. What is the marginal product of labor for TVs in Foreign? What is the no-trade relative price of TVs in Foreign?
  3. Suppose the world relative price of TVs in the trade equilibrium is PTV/PC = 1. Which good will each country export? Briefly explain why.
  4. In the trade equilibrium, what is the real wage in Home in terms of cars and in terms of TVs? How do these values compare with the real wage in terms of either good in the no-trade equilibrium?
  5. In the trade equilibrium, what is the real wage in Foreign in terms of TVs and in terms of cars? How do these values compare with the real wage in terms of either good in the no-trade equilibrium?
  6. In the trade equilibrium, do Foreign workers earn more or less than Home’s workers, measured in terms of their ability to purchase goods? Explain why.


  1. In chapter 3, we learned that workers displaced by import competition are eligible for compensation through the Trade Adjustment Assistance program. Firms are also eligible for support through Trade Adjustment Assistance for Firms, a federal program that provides financial assistance to manufacturers affected by import competition. Go to to read about this program, then answer the following:
    1. Describe the criteria a firm has to meet to qualify for benefits.
    2. What amount of money is provided to firms, and for what purpose? Describe one of the “success stories,” in which a firm used financial assistance to improve its performance.
    3. Provide an argument for and an argument against the continued funding of this federal program.


  1. Suppose two countries, Canada and Mexico, produce two goods: timber and televisions. Assume that land is specific to timber, capital is specific to televisions, and labor is free to move between the two industries. When Canada and Mexico engage in free trade, the relative price of televisions falls in Canada and the relative price of timber falls in Mexico.
    1. In a graph similar to Figure 3-5, show how the wage changes in Canada due to a fall in the price of televisions, holding constant the price of timber. Can we predict that change in the real wage?


  1. What is the impact of opening trade on the rentals on capital and land in Canada? Can we predict that change in the real rentals on capital and land?


  1. What is the impact of opening trade on the rentals on capital and land in Mexico? Can we predict that change in the real rentals on capital and land?


  1. In each country, has the specific factor in the export industry gained or lost and has the specific factor in the import industry gained or lost?


  1. Suppose that there are drastic technological improvements in shoe production in Home such that shoe factories can operate almost completely with computer-aided machines. Consider the following data for the Home country:


Computers:       Sales revenue = c = 100

Payments to labor = = 50

Payments to capital = = 50

Percentage decrease in the price = ∆ = -10%


Shoes:                 Sales revenue = = 100

Payments to labor = = 20

Payments to capital = = 80

Percentage increase in the price = ∆ = 30%


  1. Which industry is capital-intensive? Is this a reasonable question, given that some industries are capital-intensive in some countries and labor-intensive in others?
  2. Given the percentage changes in output prices in the data provided, calculate the percentage change in the rental on capital.
  3. How does the magnitude of this change compare with that of labor?
  4. Which factor gains in real terms, and which factor loses? Are these results consistent with the Stolper–Samuelson theorem?


  1. Figure 5-14 is a supply and demand diagram for the world labor market. Starting at points A and A*, consider a situation where some Foreign workers migrate to Home but not enough to reach the equilibrium with full migration (point B). As a result of the migration, the Home wage decreases from W to W′′ > W′, and the Foreign wage increases from W* to W** < W
    1. Are there gains that accrue to the Home country? If so, redraw the graph and identify the magnitude of the gains for each country. If not, say why not.
    2. Are there gains that accrue to the Foreign country? If so, again show the magnitude of these gains in the diagram and show the world gains.



  1. Access the U.S. TradeStates Express website at Click on “National Trade Data” and then “Global Patterns of U.S. Merchandise Trade.” Under the “Product” section, change the item to corn (HS 1005) and obtain the export and import values. Do the same for microphones (HS 8518); then calculate the intra-industry trade index for corn and microphones in 2012.
    1. Of the two products, corn and microphones, which product do you expect to have a higher index of intra-industry trade? Why?
    2. Do your calculations confirm your expectation from part (a)? If your answers did not confirm your expectation, explain.
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