International Economics Assignment
International Economics IIa
PC-assignment 2
University of Groningen
Faculty of Economics & Business
Academic year 2011-2012
Author: Peter van der Noord
Student number: s2035499
Programme: BSc Economics & Business Economics (Economics stream)
Course: International Economics IIa
Coordinator: prof.dr. M Koetter
Lecturer: dr. E.H. van Leeuwen
Question 5.7
The simulation file of question 5.7 repeats the Lerner diagram drawn in figure 5.4. We have assumed initially that capital's share for manufactures is 80% and for food 20% (αm= 0.8 and αf = 0.2). Furthermore, the wage rate w and rental rate r are equal to w = r = 0.2. The simulation allows you to change the wage rate and the rental rate.
5.7A What is the capital intensive and what the labour intensive good in the simulation? Explain in two different ways.
Given in the question is that capital’s share for manufactures is 80% and for food 20%. This means that manufactures use relatively much capital compared to labour in its production process and food that the production of food requires relatively little capital compared to labour (αm > αf). Hence manufactures is the capital intensive good and food is the labour intensive good in this simulation.
A different way to explain which is the capital- and which is the labour intensive good is to look at the Lerner diagram in the excel simulation. Below the Lerner diagram for our case.
From this diagram we can directly observe the capital- and labour intensive goods. The intersections of the unit value isoquants of manufactures and food with the unit value cost line show us that manufactures is the capital intensive and food is the labour intensive good. The intersection of the manufactures isoquant is at a relatively high capital level compared to labour and the other way around for the food isoquant intersection. Furthermore, the shape of the unit value isoquants
PC-assignment 2
University of Groningen
Faculty of Economics & Business
Academic year 2011-2012
Author: Peter van der Noord
Student number: s2035499
Programme: BSc Economics & Business Economics (Economics stream)
Course: International Economics IIa
Coordinator: prof.dr. M Koetter
Lecturer: dr. E.H. van Leeuwen
Question 5.7
The simulation file of question 5.7 repeats the Lerner diagram drawn in figure 5.4. We have assumed initially that capital's share for manufactures is 80% and for food 20% (αm= 0.8 and αf = 0.2). Furthermore, the wage rate w and rental rate r are equal to w = r = 0.2. The simulation allows you to change the wage rate and the rental rate.
5.7A What is the capital intensive and what the labour intensive good in the simulation? Explain in two different ways.
Given in the question is that capital’s share for manufactures is 80% and for food 20%. This means that manufactures use relatively much capital compared to labour in its production process and food that the production of food requires relatively little capital compared to labour (αm > αf). Hence manufactures is the capital intensive good and food is the labour intensive good in this simulation.
A different way to explain which is the capital- and which is the labour intensive good is to look at the Lerner diagram in the excel simulation. Below the Lerner diagram for our case.
From this diagram we can directly observe the capital- and labour intensive goods. The intersections of the unit value isoquants of manufactures and food with the unit value cost line show us that manufactures is the capital intensive and food is the labour intensive good. The intersection of the manufactures isoquant is at a relatively high capital level compared to labour and the other way around for the food isoquant intersection. Furthermore, the shape of the unit value isoquants