Question

2.

(a) Suppose that the government in country A cuts down a large part of the country’s forested area to make land available for productive purposes. Using the Specific Factors model, examine the implications of this “deforestation” on the economy’s resource allocation and relative prices. (Assume that the economy produces two goods: manufacturing and food, and owns three factors of production: land, which is specific to the food industry; capital, which is specific to the manufacturing industry; and labor, which is freely mobile between either industry). Supplement your analysis with a suitable graphical exposition.

(b) Now suppose that country A enters into trade with country B, which has similar production patterns. However, country B is relatively well endowed with capital, while land is relatively abundant in country A. Using an appropriate graphical exposition, illustrate the pattern of trade and adjustment of relative prices between the two countries.

Answer 1

2a) Agricultural production has risen over the past several decades through a combination of increased productivity and expansion of agricultural land, including expansion into tropical forests. Forest lost is directly connected with increased carbon dioxide emissions because carbon stored in trees is released to the atmosphere as carbon dioxide. Another concern is loss of biodiversity, especially from loss of tropical forests.

An increasing global population as well as change in global diets toward more vegetable oils and animal products requires increased production of agricultural commodities. Improving yields is one way of increasing production, but often additional land is needed. On average, recent annual net forest loss was 5.2 million hectares in 2000- 2010. Deforestation causes soil degradation, disruptions to ecosystem services such as water cycling and air filtration, and biodiversity loss. It is estimated to be the source of 8-14 percent of global anthropogenic carbon emissions over 2000 - 2005.

Deforestation has a diverse set of proximate causes. Historically, small scale farmers were responsible for most deforestation in tropical Southeast Asia and Latin America. Since the 1990s, mechanised agribusiness and forestry, producing for global markets rather than local markets or subsistence, have increasingly driven deforestation in developing countries. Today , commercial agriculture at local and global scales is the most significant driver of deforestation worldwide.

b) In country A land is available abundantly where as country B is endowed with more capital. Country A has similar production pattern with country B. Since country A is having more land it would be better for country A should focus on production of food. On the other hand it would be better for country B should focus on manufacturing products.

Trade between both countries considered to be more beneficial. Country A imports more manufacturing products from country B, which could help in producing more of food grains. On the other hand country B imports more food grains from A at a reasonable price. So trade certainly confers more benefits to both the countries.