ECON ECON 355 – Science and Economic Development

Economics 355 (921)Summer Session, Term I, May 2016M. VaneyProblem Set 1Due: This problem set is due Tuesday May 17 at the start of lecture.1. Innovation, Science and Economic Development Canada (https://www.ic.gc.ca/eic/site/icgc.nsf/eng/maintains a trade database (Trade Data Online) that allows the user to generate reports (tables). Use the database (or another reliable source) to determine:(a) Canada’s 10 largest trading partners (exports of goods) and $ value of exports.(b) Canada’s 10 largest trading partners (imports of goods) and $ value of imports.(c) Composition of Canada’s exports (by industry).(d) Composition of Canada’s imports (by industry).2. The production side of an economy consists of a single input (labour, L) and twoproduction goods, Rope (R) and Shoes (S). Technology is such that the marginalproductivity of labour in the production of a good is constant. In the Home country,the unit labour requirement in the production of Rope is aLR = 5; while the unit labourrequirement in the production of Shoes is aLS = 2.(a) What is opportunity cost of producing additional Rope? What is the opportunitycost of producing additional Shoes?(b) If the size of the labour force at Home is L = 3000; determine the maximumamount of Rope that can be produced (no Shoes produced) and the maximumamount of Shoes that can be produced (no Rope produced).(c) Draw the Production Possibilities Frontier for the Home economy. What are relaAtive prices, PPRS if there is no trade but both goods are produced and consumed?Compare wages paid in the two industries.T(d) If world relative prices with trade are PPRS = 2; explain using the P P F from (c)whether there is specialization of production at Home.3. Continue with the assumptions regarding Home’s production possibilities from question3. Assume the presence of another country, Foreign, with a labour force, L = 2250;and unit labour requirements aLR = 21 and aLS = 1.(a) Show the Production Possibilities Frontier for Foreign, PPF .(b) Compare productivities across countries. Determine absolute advantages and comparative advantages.T(c) Place bounds on the world relative prices, PPRS . (i.e. …nd the smallest and largestpossible free-trade prices). With trade, which country will specialize in the production of which good?1(d) Place bounds on the relative wage of the two countries,ww(i.e.ww).4. Continue with the assumptions from questions 3 and 4: The World Relative Demandfunction (RD) (demand for R relative to demand for S) is given by:QD =DQDR + QR=6DQDS + QS2PR TPS(a) For the goods market (Ropes and Shoes), derive the World Relative Supply function (RS) measuring supply of Rope relative to supply of Shoes for all possibleTworld prices PPRS .T(b) Find PPRS , by equating RS = RD and con…rm that it falls within the bounds from4:(c).(c) Determine home’s wage relative to foreign,range speci…ed in question 4:(d).wwand con…rm that it falls within the(d) Show the equilibrium in a graph that shows RS and RD.2