Survey of Interntl Economics
Survey of Interntl Economics EC 340
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Kareem Larkin PhD
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This 5 page Class Notes was uploaded by Kareem Larkin PhD on Saturday September 19, 2015. The Class Notes belongs to EC 340 at Michigan State University taught by Steven Matusz in Fall. Since its upload, it has received 18 views. For similar materials see /class/207659/ec-340-michigan-state-university in Economcs at Michigan State University.
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Date Created: 09/19/15
Problem Set 1 0 Given the straight line PPF the price of X interms of Y is the same regardless of where the economy produces as long as it produces both goods 0 The slope of the PPF re ecting opportunity cost determines relative autarky price while demand conditions determine the quantities of each good produced where the economy will locate along the PPF Problem Set 2 o In autarky the price of X in terms of Y ie PxPy equals the absolute value of the slope of the PPF o A reduction in the price of imports relative to exports is an improvement in the country39s terms of trade 0 A terms of trade improvement allows a country to import more while keeping exports constant An improvement in a country39s terms of trade means that the price of imports falls relative to the price of exports The same quantity of exports can now purchase a larger quantity of imports 0 An improvement in the terms of trade has no effect on the PPF It is the consumption possibilities frontier that becomes steeper Problem Set 3 39 PX aLx W o All markets are assumed to be perfectly competitive in the Ricardian model 0 All workers are assumed to be identical in the Ricardian model 0 A technology is said to be characterized by constant returns to scale if changing all inputs by a particular percentage causes output to change by the same percentage and in the same direction 0 In a Ricardian economy a 10 uniform increase in productivity for both sectors of the economy would have the same effect on the production possibilities frontier as a 10 increase in the labor supply 0 The pattern of trade depends on the pattern of COMPARATIVE advantage not on ABSOLUTE advantage Indeed it is possible for a country to have an absolute disadvantage in all goods but it will always have a comparative advantage in some good 0 Workers can move in between SECTORS in the Ricardian model 0 A Ricardian economy has only ONE factor of production usually labor 0 A doubling of labor productivity in both sectors does not change the slope of the production possibilities curve therefore it does not change the opportunity cost of production 0 In the Ricardian model technology is represented by a single number that describes how many workers are necessary to produce a single unit Problem Set 4 In an economy with only two goods X and Y and where all income is spent the w of the excess demand for X must equal the value of the excess supply of YNOT SUPPLY In an economy with only two goods X and Y and where all income is spent if the quantity of X demanded equals the quantity of X supplied then the quantity of Y demanded must equal the quantity of Y supplied This is an implication of Walras s Law The value of excess demand for X would be zero so the value of excess demand for Y must also be zero so that the two excess demands sum to zero PxPySx Dx Sy Dy 0 WALRA S LAW Suppose that the United States has a comparative advantage in aircraft production and a comparative disadvantage in automobile production A large productivity improvement in US aircraft production could actually reduce US welfare We assume that labor cannot move between countries in the Ricardian model Only the change in productivity will lead to an increase in real income Real income increases as productivity increases Problem Set 5 The Ricardian model assumes that all workers have the same productivity and can easily move between sectors Workers are in all essential characteristics the same If trade is beneficial for one worker it is beneficial for all Lovi figured out the reason that displaced workers lost their jobs by assuming that workers initially employed in industries that were subject to a great deal of import competition were the victims of globalization while those who had been employed in industries relatively sheltered from import competition were displaced for other reasons The real wage in one country is unambiguously higher than that in another if the real wage in terms of BOTH good X and good Y is higher in the former than in the latter Assuming that there are adjustment costs to trade liberalization which of the following statements best describes an economy that moves from autarky to free trade There are shortrun losses and longterm gains with the gains outweighing the losses The average job tenure prior to displacement is roughly 6 7 years According to Lori Kletzer s findings women and minorities form a larger share of displaced workers in industries that are subject to significant import competition compared with industries that are relatively shielded from import competition More than one third of all displaced workers who become reemployed do so with no loss in income and in many cases have higher wages Adding adjustment costs means that some resources may become unemployed for some period of time While unemployed they are not producing any goods or services A sufficiently large decline in the total amount of goods and services produced will cause the consumption frontier to lie inside of the production possibilities frontier Zero Pro t Condtion WPy WPx X PXFY multiply fractions together in question Problem Set 6 HO Sam model assumes identical demand conditions The generalequilibrium supply curve with increasing opportunity costs is upward sloping We use the word quottechnologyquot to describe a listing of all possible ways in which various factors of production can be combined to produce output HeckscherOhlin theoremThe capitalabundant country has a comparative advantage in the capitalintensive good Rybczynski theoremAn increase in the amount of capital holding constant the amount of labor will increase production of the capitalintensive good more than proportionately while decreasing production of the laborintensive good StolperSamuelson theoremAn increase in the price of the capitalintensive good relative to the price of the laborintensive good will increase real income of capital owners while reducing the real wage for workers Both the H0 and Ricardian models assume that all markets are perfectly competitive Constant returns to scale means that increasing or decreasing all inputs by the same proportion leads to an increase or decrease in ouput by that same proportion Increasing opportunity cost means that marginal increases in the production of one good result in every increasing costs in terms of the amount of the other good that must be sacrificed The two concepts are consistent with each other Both HeckscherOhlinSamuelson and Ricardian assumes that all factors of production are fully employed A country will produce both goods for a wide range of relative prices if there are increasing opportunity costs Factors of production are the name given to primary inputs used in the production process HeckscherOhlinSamuelson model assumes that all countries have access to the same technology Financial resources are not considered quotcapita quot in the context of the HeckscherOhlin trade model Capital intensive good has higher capital per worker 39fHJHE gm 1 Problem Set 7 The zeroprofit conditions for both sectors are represented by downwardsloping lines The more expensive that one input becomes means that the other must get cheaper in order to maintain zero pro t An increase in the price of X shifts out the zeroprofit curve for sector X The position of each fullemployment condition depends on the supply of each factor and the technology of production The price of output is not relevant The Rybczynski theorem is used in the proof of the HeckscherOhlin theorem Proof of the factor price equalization theorem uses the zeroprofit conditions The zeroprofit conditions are used in the proof of the StolperSamuelson theorem by graphing the zeroprofit conditions we can show how changes in factor prices respond to changes in output prices If the fullemployment curve for capital is steeper than that for labor then the good on the horizontal aXis is the capital intensive good The full employment conditions are used in proving the Rybczynski Theorem StolperSamuelson model is only concerned about 1 country Capital intensity of a sector is represented by the absolute value of the zero profit curve Problem Set 8 its falseEvidence supporting a quotStolper Samuelsonquot explanation of the change in US income distribution during the 1980s is that the opposite changes occured in most developing countries E A True 3 B False Feedback In fact the real income for skilled labor increased while that for unskilled labor decreased as in the US in many developing countries as well W Leontief was the first to investigate the empirical relevance of the H0 model The first empirical test of the H0 model used US trade data from 1947 A careful exploration of trade data reveals that the amount of trade that actually occurs among countries is much smaller than what would be predicted by the H0 model The HO model provides predictions about both the volume and pattern of trade The factor price equalization theorem casts doubt on the impact of immigration on the distribution of US income Real wages for Us workers who did not attend college fell on average during the 1980s Consider goods imported by the Us We measure the factor content of these goods on the basis of Us technology but if other countries use different technology then the actual factor content of US imports might be different than that calculated based on US technology 0 Skillbiased technical change has been proposed as a possible explanation of the change in the income distribution observed in the United States during the 1980s 0 There was virtually no change in this relative price of good in the 1980s 0 One possible explanation for the paradoxical results obtained in early empirical work on the H0 model is that the US exports goods that are relatively intensive in the use of skilled labor while importing goods relatively intensive in the use of unskilled labor 0 Goods are consumed in the same proportion only if relative prices are the same in all countries What may differ across countries is the level of income 0 Real wages for US workers who did not attend college fell on average during the 1980s 0 There is strong empirical evidence that a surge of globalization during the 1980s caused the gap between the real incomes of rich and poor in the United States to widen o Skillbiased technical change can only explain the change over the 1980s in the US distribution of income if the technical change is concentrated in skill intensive sectors 0 US exports were labor intensive compared to imports even the US was capital abundant contradicts HO model 0 It IS possible to collect data to test the H0 model Problem Set 9 o The quotmonopolyquot component of monopolistic competition means that Easy entry drives profit to zero 0 Increasing returns to scale are most likely to result in the type of trade where a country39s exports and imports both come from the same industrial classification 0 As long as a firm can produce more or less of a good it can increase its profit if its marginal revenue does not equal its marginal cost Profit is maximized when marginal revenue equals marginal cost When the two are not equal profit is not maximized and can be made larger by adjusting output 0 Firms in monopolistic competition can increase price without losing their entire market share Therefore firms are NOT price takers in a monopolistically competitive market 0 A firm could increase its profits by producing more if its marginal revenue were greater than its marginal cost 0 In the oligopoly model of trade that was developed in the lessons the profit maximizing strategy for each firm is to reduce its output when its rival firm increases output 0 back of sheet 0 Grubel Loyd Index lexportsimportsexportsimports o In oligopoly as rival firms increase their sales the price intercept becomes smaller but the slope remains unchanged 0 A disproportionate share of world trade occurs among countries that are realtively similar to each other
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