Econ 490: International Trade
Lecturer: Ani Vardanyan
Due Date: Friday, 13 May, 2016, 11 am.
Instructions to students:
Please answer ALL questions.
Questions 4, 5, 12,
13 and 14: 8 points each.All other
questions: 6 points each.All
sub-questions within the questions carry equal marks.
1. a) Japanese labor productivity is roughly
the same as that of the United States in the manufacturing sector (higher in
some industries, lower in others), while the US is still considerably more
productive in the service sector. But most services are non-traded. Some
analysts argue that this poses a problem for the US, because its comparative
advantage lies in things it cannot sell in world markets. What is wrong with
this argument?
b) Japan is a very expensive place.
Although Japanese workers earn about the same as their US counterparts, the
purchasing power of their incomes is less. Explain this, using your discussion
from part a).
2. a) The Ricardian model of trade predicts
extreme specialization. How? Use graphs to explain?
b) Why in reality specialization is not as extreme as
predicted? Discuss the possible reasons.
3. Assume there is only one factor of
production, labor. Construct a numerical example using two countries, A and B,
and assign unit labor requirements to good 1 and good 2 for each country, such
that:
a)
Country
B has an absolute advantage in both and comparative advantage in good 1.
b)
Country
A has an absolute advantage in both and comparative advantage in both goods.
c)
Country
B has an absolute advantage in both products and the two countries have the
same opportunity cost of both goods.
d)
Explain
what the trade pattern could be in the equilibrium in each of the cases above.
4. Assume there are two goods, cloth and food
produced by a country. Labor is used in both sectors and is mobile between the
sectors. Capital is the factor specific to cloth production, and land is the
factor specific to food production, both are not mobile between the sectors.
Assume cloth prices increase by 10 per cent and food prices increase by 2 per
cent. Analyze how the real wages of the factor owners are affected by the price
changes. Use graphs.
5. Discuss how the Heckscher-Ohlin model and
the outsourcing model (the one explained in class) are similar and different in
terms of explaining the change in skilled-unskilled wage differentials. More
specifically, discuss the similarities and differences in the mechanisms and
the predictions of the models.
b) How could you distinguish the effect of
trade from the effect of skill-biased technological change in the case of the
Heckscher-Ohlin model and the outsourcing model? Which one would be harder to
empirically distinguish from the impact of skill-biased technological change,
the impact of trade on skilled- unskilled wage differential through the
Heckscher-Ohlin model or through the outsourcing model? Why? Use graphs where
necessary?
6. Comment on the following statement:
âProfessionals and highly educated workers are more likely to oppose limits on
free trade as compared with high-school educated workers, because they have a
better understanding of international tradeâ.
7. a) Explain what âimmiserizing growthâ
means. Use graphs to illustrate the situation.
b) Why do most economists regard
âimmiserizing growthâ as unlikely in practice.
8. What will the existence of economies of
scale do to perfect competition? Explain.
9. Use the model of external economies to
scale and show, using graphs, how can trade create gains from trade. Show how
trade can create losses from trade.
10.
Briefly
explain the sources of gains from trade in the internal economies of scale
model.
11.
How
does the model of internal economies of scale generate winners and losers? What
is the importance of the cutoff cost in this context? Use graphs where
necessary.
12.
Assume there are three countries: Home,
Foreign and Country 3. Automobiles are produced by a monopolistically
competitive industry like in the model described in lectures. The demand curve
facing any given producer of automobiles is described by the following
equation:
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where all notations are as in the lectures.
Assume b=1/30,000. Assume that the fixed cost is $750,000,000. Assume marginal
cost=$5,000 per automobile. Assume home has annual sales of 900,000
automobiles; Foreign has annual sales of 1.6 million, and country 3 has annual
sales of 3.75 million automobiles. Find the number of firms, the output per
firm, and the price per automobile in the new integrated market after trade.
13.
Assume country A, that is unable to affect
world prices. It imports peanuts at the price of $10 per bag. The demand curve
is D=400-10P. The supply curve is S=50+5P.
a)
Determine
the free trade equilibrium.
b)
Calculate
and graph the following effects of an import quota that limits imports to 50
bags.
1)
The
change in the domestic price
2)
The
quota rents
3)
The
consumption distortion loss
4)
The production
distortion loss.
14.
Why
import quota creates more monopoly power than a tariff? Use graphical analysis
in your explanation.
15.
Give an intuitive explanation for the optimal
tariff argument.