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International Trade

by: Brett Stanton

International Trade ECON 37000

Marketplace > Purdue University > Economcs > ECON 37000 > International Trade
Brett Stanton
GPA 3.6

David Hummels

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David Hummels
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This 11 page Class Notes was uploaded by Brett Stanton on Saturday September 19, 2015. The Class Notes belongs to ECON 37000 at Purdue University taught by David Hummels in Fall. Since its upload, it has received 57 views. For similar materials see /class/207953/econ-37000-purdue-university in Economcs at Purdue University.


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Date Created: 09/19/15
Econ 370 Fall 2008 ANSWER KEY FIRST MIDTERM EXAMINATION Warm up questions hintboth answers are true 1 I have written my name and student number on each page of the exam and the bubble sheet 2 You see a sink with two handles marked hot and cold and you turn the handle marked hot It is very likely that hot water will come out Questions 38 refer to empirical evidence taken from our class discussions and the textbook 3 Since 1970 international investment of all kinds has grown less quickly than international merchandise trade False See first day notes 4 Countries with rising labor productivity experience falling wages because fewer workers are needed to produce the same amount of output False Rising labor productivity correlates to higher wages see text figure 28 5 Countries used to trade primarily with close neighbors but globalization means that proximity no longer matters to trade patterns False Countries still trade primarily with neighbors See first day notes figure 12 6 Before David Ricardo articulated the theory of comparative advantage mercantilists believed countries gained from exporting and lost from importing True See sidebar on text page 32 7 In the US Trade Adjustment Assistance TAA is designed to help factory owners who suffer losses due to import competition False TAA is designed to help workers displaced by import competition See p 7579 8 An early study of the HeckscherOhlin theory by Wassily Leontief found that US imports have a higher capitallabor ratio than US exports True This is called the Leontief Paradox see p 108109 For questions 917 assume we have a Ricardian model of trade with two countries US Mexico producing two goods apples wheat US Mexico Total Labor 200 100 Total Possible Output of Each Good if all labor were used to produce only that good Apples 100 50 Wheat 40 40 Note that the table above describes the total labor force of each country and total production of each good that could be attained if all labor were used to produce that good Finally assume that consumers in both countries have identical preferences the same indifference curves First translate these total outputs into unit labor requirements using output La or a Loutput US Mexico Total Labor 200 100 Unit labor requirements Apples 2 2 Wheat 5 25 Or you can do it in terms of marginal products of labor using output L MPL or MPL outputL US Mexico Total Labor 200 100 MPL Apples 05 05 Wheat 02 04 In autarkyquestions 912 9 The marginal product of labor in wheat production is the same in both countries False It is higher in Mexico 10 The price of apples price of wheat is lower in the US True Pupple aapplzs P a whzat whzat For the US 2504 For Mexico 225 08 11 The US consumption frontier measured on a per person basis is lower than Mexican consumption possibilities True To get the consumption frontier on a per person basis divide the total output in each sector by total labor force The result is the same as the marginal product of labor in each sector Note that the MPL is the same in both countries for apples but is lower for the US in wheat That means that the US CPF measured on a per person basis is lower than Mexico 12 People in the US should consume the same ratio of appleswheat as people in Mexico False PW f preferences are the same and is lower in the US people in the US should consume more whzat apples In moving from autarky to free tradequestions 1317 13 The US should export wheat False PW The US has lower autarky than Mexico and should export apples when 14 Mexican apple output should rise False Mexico should export wheat which requires that they produce more wheat and fewer apples 15 The prices of applesprice of wheat in the US should rise True Free trade causes the price of your export good to rise and the price of your import good to fall 16 Workers in both countries should be better off as measured by the rise in consumption possiblities True 17 The ratio of appleswheat consumed in the US should fall PW True As rises people will consume fewer apples and more wheat whzat For questions 1827Brazil and Chile produce coffee and wine using land and labor Labor is mobile between the sectors however coffee beans and wine require different soil and climate This means that some land is good only for growing coffee beans and some land is only good for growing wine grapes Brazil is relatively abundant in coffeegrowing land while Chile is relatively abundant in wine grape growing land Preferences are identical in both countries Draw the RS curves with P P WW 07 on the vertical aXIs and QWW Qmf22 on the horizontal aXIs Chile39s RS curve lies to the right of Brazil39s That means that Chile has a low relative P P wmz 50722 Questions 18 19Assume both countries are in autarky 18 At the same relative output levels Q WW mefzz BraZIIIan prIces of Wine relative to coffee PWW Hagf are higher than in Chile True 19 Chilean consumers will prefer to purchase a higher ratio of winecoffee than consumers in Brazil True Since P P wmz 50722 QW QM is lower in Chile than in Brazil consumers will consume a higher ratio of Questions 2023 Still in autarky the demand for coffee rises and the demand for wine falls in both countries In the new equilibrium in Chile To see this effect shift the RD curve down and to the left Or using the bucket diagram shift the labor demand curve for coffee up and the labor demand curve for wine down 20 The price of coffee should rise relative to the price of wine True 21 The marginal product of labor in wine should rise True The rise in coffee prices pulls labor into the coffee sector and out of the wine sector Since MPL is declining in L this causes MPL in wine to rise 22 Coffee producing firms should hire more labor True You can see this from the bucket diagram Since labor demand P MPL a rise in coffee prices causes the marginal benefit of hiring coffee workers to rise 23 The value of land used to grow coffee should fall while the value of land used to grow wine grapes should rise False The land returns depend on prices and the marginal product of land Both are going up for coffee both are going down for grapes Questions 24 27 Now let Chile and Brazil trade with each other In the move from autarky to free trade 24 Brazil exports coffee True 01 PWW Is lower In BraZIl P P is higher for Brazil than in Chile which means that PC wmz 50722 25 The price of wine relative to coffee will rise in Chile True Trade causes product prices to converge and P P started lower in Chile wmz mffzz 26 Owners of wine grape land in both countries are worse off as a result of free trade False Since P P WW 0722 rises in Chile owners of wine grape land will be better off 27 The relative quantity of winecoffee consumed in Chile will rise False Since P P W2 W2 rIses consumers there Will buy less Wine and more coffee Questions 2835 use a HeckscherOhlin model of trade Japan and China produce cars and shirts using two factors capital and labor that are mobile across sectors Cars are capitalintensive Shirts are laborintensive The countrywide capitaloutput ratio is higher in Japan than in China The cost of labor is w The cost of capital is r Questions 2831ln autarky 28 At the same factor price ratio wr shirts use a higher laborcapital ratio than cars in Japan True This is the definition of laborintensive 29 A fall in the cost of labor relative to capital wr falls will cause both shirts and cars in Japan to use more labor True Demands for each input are decreasing in their price See figure 41 30 We would expect to see the marginal product of capital in Japan to rise after wr falls True As wr falls japan will start to use more labor and less capital This will drive down the MPL and drive up the MPK 31 At the same output ratio Q m Qshm China has a lower opportunity cost for producing cars than does Japan False China has less capital and cars are capitalintensive This means that at the same output ratio car output will have a higher opportunity cost for China Questions 3235 In the move to free trade 32 Japan should export cars True 33 The relative demand curve for laborcapital in China as a whole should shift right True Recall that the RD curve for laborcapital depends on the labor and capital intensity of production for cars and shirts and on the importance of cars and shirts in production China will specialize in shirts meaning that the demand for factors coming from shirts will be more important The RD curve for the economy as a whole shifts right to look more like demand for laborcapital from the shirt section 34 The factor price ratio wr in Japan and China should converge True Trade causes the price of the scarce factor to fall and the abundant factor to rise For Japan wr falls for China wr rises They converge 35 The quantity of laborcapital demanded by the car industry in Japan should rise True Trade causes the price of the scarce factor to fall and the abundant factor to rise For Japan wr falls As wr falls in japan labor becomes less expensive and the car industry should use more labor Short Answer 1 30 pts The US and Canadian fishing fleets both fish in the same waters in the North Atlantic but the US fleet is 10 more productive than the Canadian fleet Swordfish populations in the North Atlantic are falling rapidly and are in danger of going extinct In response the US government puts a strict quota that cuts in half the number of fish that can be caught by each USowned swordfish boat Answer abc d a How would the quota impact US production possibilities and fish prices in autarky The quota effectively lowers the marginal product of capital in the fishing sector If we were to graph fishing output against output from another sector the PPF would shift in relatively more for the fish sector The increased scarcity of fish in the US market plus an inability to import them from abroad causes their price to rise b How would the quota impact the pattern of trade and the returns to owning fishing boats in the US and Canada in free trade The US starts off with a 10 efficiency advantage and then has its productivity cut in half The restrictions should give Canada a comparative advantage in fishing That is autarky prices in Canada are now below US autarky prices Canada should start exporting fish to the US Returns In the US the fishing quotas would directly lower the marginal product of capital but this would be partially compensated by a rising price in autarky Free trade with Canada would then push fish prices down For the US this would represent a significant decrease in the returns to owning fishing boats For Canada the restriction would probably increase the MPK of their boats more fish to catch with US boats out of the way And the supply reduction on the US side would push up prices The returns to their fishing fleet would rise c Compare the US quota to two alternative policies fixed quotas for both fishing fleets or permits to catch swordfish initially assigned to each nation and then made tradeable Which policy has the best chance to help fish populations recover with the least economic inefficiency US quota Production would be diverted from the US fleet to the Canadian fleet meaning that fish populations would still be heavily overfished US Canada quota This would reduce the incentive for Canada to ramp up production to offset a US only quota However the quota hits efficient and inefficient fleets the same way Tradeable fishing permits This would also reduce the incentive for Canada to boost production but it allows a reallocation of fishing rights so that the more efficient producer could produce more d If tradeable permits were put in place which country should buy and which country should sell fishing permits The US is more efficient so it should buy fishing permits from Canada and catch more fish Canada should fish less and sell the rights to fish to US firms Short Answer 2 20 pts Compare the Ricardian and Specific Factors Models when labor is mobile across two sectors of production X and Y Answer abcd a Describe in words and an equation what determines the demand curve for labor in the Specific Factors model Does this equation also work for the Ricardian model Firms hire workers until marginal costs equal marginal benefits wage price MPL Yes Note that in the Ricardian model MPL 1 a where a unit labor requirement We showed that in the Ricardian model p w a you can also write this as w pa and since a lMPL you get back wpMPL The only difference is that in the Ricardian model MPL is a constant b For each model describe what determines opportunity costs of production and describe what happens to the opportunity cost of producing X as production of Y falls In both models opportunity costs are given by the ratio of marginal products of labor So moving one unit of labor from Y production to X production yields MPLX more x output and MPLy less Y output In the Ricardian model the MPL in each sector is a constant so the opportunity cost does not change as production of Y falls In the SF model rising Lgt falling MPL Production of Y down gt L used in Y down gt MPLy up And at the same time production of X up gt L used in X up gt MPLX down So the opportunity costs of X production are rising as Y output falls c What does your answer to 2b imply should happen to product prices in each model as Y output falls p MPLy Prices reflect opportunity costs of production Py MPL In the Ricardian model the marginal products are constant so prices do not change as we move along the PPF Once we hit the axis and we are completely specialized in producing one good prices can change P In the SF model the marginal products are changing so y d What does it imply about the likelihood that a country will completely specialize produce only one good In the Ricardian model opportunity costs and prices don39t change until the country completely specializes In the SF model every incremental increase in output of the export good raises opportunity costs and prices This makes it much more likely that prices will converge on the foreign price before the country has specialized completely


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