Justify your answers for full credit.

1. Listen to the podcast Trade  Talks Episode Number 91, “Can Trade Adjustment Assistance Work?” from July 4, 2019. You can access the podcast from the Econ 425 website or from the Trade Talks website.

(1.A.) (7 points) Explain the selection effect that the researcher faces and how he deals with it in his study.

(1.B.) (8 points) Explain how this podcast relates to our study of the Specific Factors Model.

2.  (15 points) This question considers graphics for the Specific Factors Model. A small country is characterized by ( )c  > ( )o  and the country is trading. Assume that when the relative price of a good increases, aggregate demand for that good falls and when the relative price

a good decreases, aggregate demand for that good rises.  Assume that aggregate indifference curves exist.

Suppose there is some shock that causes the terms of trade to deteriorate for the small country but the pattern of trade remains the same. Draw a production possibilities diagram with good A on the vertical axis and good M on the horizontal axis to show and explain the effect of this shock on output of each good, aggregate consumption of each good, exports or imports of each good, and aggregate welfare in the small country.

3.  This question is a computational question on the Specific-Factors model of trade.  Here we focus on the home country (H) who may or may not be trading with the rest of the world. There are two final goods, computer software (X) and clothing (Y). There are three types of labour used in production, general labour which is used in both industries, high-skilled labour which is used only in production of computer software, and low-skilled labour which is used only in production of clothing.

The technologies for producing the goods in H are given by:

QX  = (LX).2 (S).8                             QY  = (LY).2 (U).8 ,

where QX  and QY  denote output of software and clothing respectively; LX  and LY  are input of general labour into software and clothing respectively; and S and U are the supplies of high- skilled labour and low-skilled labour respectively.

There are three consumers in H .  The consumers have different types of labour to supply as follows: Consumer 1 has 400 units of high-skilled labour; Consumer 2 has 500 units of low-skilled

labour; and Consumer 3 has 600 units of general labour.

Consumers 1 and 2 have the same utility function given by:

U(dX ,dY ) = (dX ).6 (dY ).4 .

Consumer 3 has a utility function given by:

U(dX ,dY ) = (dX )α (dY )1 −α

0 < α < 1.

Recall that if the utility function takes the this Cobb-Douglas form, then the Marshallian de- mands take the following form:

dX  = ( ) I

dY  = ( ) I,

where I is income of a consumer.

Let the wage of high-skilled workers be denoted wS , the wage of low-skilled workers as wU , and the wage of general workers as wL .

In answering questions (3.A.)-(3.B.), keep α as a general parameter so some of your answers will

be written as functions of α .