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1.Heckscher-Ohlin Model: a) (2pts) State the Hecksher-Ohlin Theorem b) (2pts) State the Stopler-Samuelson Theorem c) (6pts) Use the following Numerical Example to prove the Stopler-Samuelson Theorem: Suppose the following for the production of Steel Sales Revenue = Ps*Qs= $250 Payments to labor =w*Ls=$100 Payments to capital =R*Ks=$150 Suppose the following for the production of Coats Sales Revenue = Pc*Qc=$250 Payments to labor =w*Lc=$150 Payment to capital = R*Kc=$100 Price of Coats increases by 20% and the Price of Steel stays the same.
2. Suppose a zero coupon security has a face value of $1000 and a maturity of 5 yea 1f the return on comparable securities is 6%, calculate the market price of this security, years, a securities ). interest payments Assuming that the interest coupon payment. 2. Suppose a coupon security has a face value of $1000, a maturity of 4 years, coupon rate of 4% and a vield to maturity of 3% (return on comparable s are made semi-annally, calculate the following: A. The value of the col B. The number of payments received by holders of this security and the value of each payment. C. Based on your answer to B, calculate the present value of each of one of the payment received by holders of this security. D. Based on your ansver to C, calculate the market price of the security.
Expert Solution
1. The Heckscher-Ohlin model first proposed in 1919 by Eli Heckscher and then updated by Bertil Ohlin in 1933, is based on the assumption of 2X2x2 i.e. 2 countries 2 commodities and 2 factors of production. The model has been used to evaluate the equilibrium trade among 2 countries which differs in terms of available resources. The theory states that a country will export goods requiring factor of production that a country has in abundance. So a country which is capital abundant will export capital intensive good or if a country is labor-abundant it will export labor intensive goods. In this type of model a country is advantageous in production solely from its relative factor abundance.
b) As per the Stolper- Samuelson Theorem any changes in prices of commodity affect the prices of factors of production, which is when both positive production as well as zero economic profit are maintained in each industry considered. This theorem is useful in analyzing the effects on factor income, either
- When countries move from autarky(no trade) to free trade or
- When tariffs or any other government regulations are imposed within the context of Heckscher-Ohlin Model
The theorem assumes perfect competition in all the markets, because of which if production occurs in an industry then economic profits are driven to zero.
c) Refer to the below image for the calculations of given numerical:
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2.1. The price of the bond can be calculated as follows
2. Face value = $ 1,000
Coupon rate = 4%
YTM = 3%
Useful life = 4 years
Interest is paid semi annually
A. Coupon = 4% × $ 1,000 = $ 40 per year
B. Number of coupon payment = 2 × 4 = 8
Value of each coupon = $ 20
C. Present value of coupon payment.
Pc = 20(P/A,3/2%,8) = 20 × 7.48592 = $ 149.72.
D. Price of bond
P = Pc + 1,000/1.015^8
P = 149.72 + 887.71
Price of bond = $ 1,037.43
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