ECON0023 International Trade - Tutorial 1
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International Trade - Tutorial 1
ECON0023
1. When a country can produce a good or service at a lower opportunity cost than another country, the country is said to have a(n):
A. comparative advantage
B. absolute advantage
C. trading advantage
D. cost advantage
E. none of the above
2. The Ricardian model attributes the gains from trade associated with the principle of comparative advantage to:
A. differences in preferences
B. differences in labour productivity
C. differences in resources
D. gravity relationships among countries
E. none of the above
3. Assume aLW and aLC are the unit labour requirements in wine and cheese production, respectively. The opportunity cost of cheese in terms of wine is
A. 1/aLW
B. 1/aLC
C. aLC /aLW
D. aLW /aLC
E. none of the above
4. Assume PC and PW are the prices of cheese and wine, and aLW and aLC are the unit labour requirements in wine and cheese production, respectively. The economy will specialize in the production of cheese and will not produce wine if:
A. PC /PW = aLC /aLW
B. PC /aLC > PW /aLW
C. PC /PW > aLC /aLW
D. PC /PW < aLC /aLW
E. none of the above
5. Assume Home’s unit labour requirements in wine and cheese production are aLW and aLC , while Foreign’s unit labour requirements are aL(*)W and aL(*)C . Home has a compar- ative advantage in cheese production when:
A. aLC /aLW > aL(*)C /aL(*)W
B. aLC /aLW < aL(*)C /aL(*)W
C. aLC /aLW = aL(*)C /aL(*)W
D. aLC /aL(*)C < aLW /aL(*)W
E. aLC /aL(*)C > aLW /aL(*)W
Table 1: Unit Labour Requirements
|
|
Cloth |
Widgets |
|
Home |
10 |
20 |
|
Foreign |
60 |
30 |
6. Given the information on unit labour requirements in Table 1, Home should:
A. export cloth
B. export widgets
C. export both and import nothing
D. import both and export nothing
E. none of the above
7. Assume that transportation costs are especially high for widgets in the example above, and Foreign enjoys a comparative advantage in widgets, then:
A. Home must also enjoy a comparative advantage in widgets
B. Home may end up exporting widgets
C. Foreign may switch to having a comparative advantage in cloth
D. Foreign will still export widgets
E. Trade may be impossible between the two countries
8. Home has 1,200 units of labour available. If can produce two goods, apples and ba- nanas. The unit labour requirement in apple production is 3, while in banana produc- tion it is 2.
(a) Graph Home’s production possibility frontier.
(b) What is the opportunity cost of apples in terms of bananas?
(c) In the absence of trade, what would be the price of apples in terms of bananas? Why?
9. Home is as described in the question above. There is now another country, Foreign, with a labour force of 800. Foreign’s unit labour requirement in apple production is 5, while in banana production it is 1.
(a) Graph Foreign’s production possibility frontier.
(b) Construct the world relative supply curve.
10. Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples.
(a) Graph the relative demand curve along with the relative supply curve. (b) What is the equilibrium relative price of apples?
(c) Describe the pattern of trade.
(d) Show that both Home and Foreign gain from trade.
International Trade - Tutorial 2
ECON0023
1. The Heckscher-Ohlin model differs from the Ricardian model in that the former:
A. has only two countries
B. has only two products
C. has two production possibility frontiers
D. has two factors of production
E. has varying wage rates
2. According to the H-O model, the source of comparative advantage is a country’s:
A. technology
B. human capital
C. factor endowments
D. political system
E. none of the above
3. Which of the following statements regarding an economy’s production in the Heckscher- Ohlin model is false?
A. It produces at the point that is on the highest possible isovalue line.
B. It minimizes the value of production given the prices it faces.
C. It maximizes the value of production given the prices it faces.
D. It produces at the point at which the opportunity cost of production is equal to the relative prices of outputs.
E. none of the above
Table 1: Factor Endowments
|
|
Country A |
Country B |
|
Labour Force |
45 |
20 |
|
Capital Stock |
15 |
10 |
4. Given the information on factor endowments in Table 1, and assuming that good S is capital intensive, the H-O model would predict that:
A. Country B will export good S
B. Country A will export good S
C. Both countries will export good S
D. Both countries will import good S
E. Trade will not occur between these two countries
5. Suppose there are two factors of production, capital and land. Assume that Australia has relatively more land, and Belgium has relatively more capital. Trade between these two countries, according to the H-O model, would mean:
A. The relative price of the capital-intensive product would increase in Belgium
B. The relative price of the land-intensive product would increase in Australia
C. The relative price of the land-intensive product would decrease in Belgium
D. The relative price of the capital-intensive product would decrease in Australia
E. All of the above
6. Suppose there are two factors of production, capital and land. Assume that Australia has relatively more land, and Belgium has relatively more capital. Trade between these two countries, according to the H-O model, would mean:
A. The real income of labour in Australia would decline
B. The real income of labour in Belgium would decline
C. The real income of land owners in Belgium would decline
D. The real income of capital owners in Australia would increase
E. None of the above
7. The 1987 study by Bowen, Leamer and Sveikauskas:
A. proved that the U.S.’s comparative advantage relied on skilled labour
B. provided empirical support for the Heckscher-Ohlin model
C. provided empirical support for the Leontief Paradox
D. provided empirical support for different technologies across countries
E. used a two-country, two factor, and two-product framework
8. “The world’s poorest countries cannot find anything to export. There is no resource that is abundant - certainly not capital or land, and in small poor nations not even labour is abundant.” Discuss.
9. One of the commonly used assumptions in deriving the Heckscher-Ohlin model is that the tastes of consumers are homothetic, or that the proportions of their expenditures allocated to each product would be the same. Imagine that this assumption is false, and that in fact, the tastes in each country are strongly biased in favor of the product in which it has a comparative advantage. How would this affect the relationship between relative factor abundance and the nature (factor-intensity) of the product each exports? What if the taste bias favored the imported good?
10. Will free trade and perfect competition lead to an equalization of wage rates inter- nationally? Explain. Why might the wage rate greatly vary between developed and developing countries, in the same sector in a real world situation, even after the adop- tion of free trade?
International Trade - Tutorial 3
ECON0023
1. Assume Indonesia and China are trading partners. Indonesia initially exports palm oil to and imports lubricants from China. Using the standard trade model, explain how an increase in the relative price of palm oil, in relation to lubricant prices, would affect the production and consumption of palm oil for Indonesia (assuming that the taste for both goods is the same in both countries). If the income effect of price change of palm oil is greater than the substitution effect, what would happen to palm oil consumption in Indonesia?
2. Due to overfishing, Norway becomes unable to catch the quantity of fish that it could in previous years. This change causes both a reduction in the potential quantity of fish that can be produced in Norway and an increase in the relative world price for fish, Pf /Pα .
(a) Show how the overfishing problem can result in a decline in welfare for Norway. (b) Also show how it is possible that the overfishing problem could result in an increase in welfare for Norway.
3. In some economies relative supply may be unresponsive to changes in prices. For exam- ple, if factors of production were completely immobile between sectors, the production possibility frontier would be right-angled, and output of the two goods would not de- pend on their relative prices. Is it still true in this case that a rise in the terms of trade increases welfare? Analyze graphically.
4. The Netherlands primarily exports agricultural products, while importing raw mate- rials such as natural gas, metal ores, and grains. Analyze the impact of the following events on the Netherlands’ terms of trade:
(a) Farm pollution in China is worsening.
(b) Egypt is planning to import large quantities of liquefied natural gas.
(c) Germany has a sustainable development strategy for raw materials and energy productivity.
(d) OPEC’s agreement with Russia cut oil production and pushing oil prices higher. (e) A rise in the Netherlands’ tariffs on imported iron and steel.
5. Countries A and B have two factors of production, capital and labor, with which they produce two goods, X and Y. Technology is the same in the two countries. X is capital- intensive; A is capital-abundant. Analyze the effects on the terms of trade and on the
two countries’ welfare of the following:
(a) An increase in A’s capital stock.
(b) An increase in A’s labor supply.
(c) An increase in B’s capital stock.
(d) An increase in B’s labor supply.
International Trade - Tutorial 4
ECON0023
1. Home’s demand curve for books is
D = 50 − 10P
It’s supply curve is
S = 10 + 10P
Derive and graph Home’s import demand schedule. What would the price of books be in the absence of trade?
2. Now add Foreign, which has a demand curve
D* = 50 − 10P
and a supply curve
S* = 30 + 10P
(a) Derive and graph Foreign’s export supply curve and find the price of books that
would prevail in Foreign in the absence of trade.
(b) Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and graph the equilibrium under free trade. What is the world price?
What is the volume of trade?
3. Home imposes a specific tariff of 0.25 per unit on imported books.
(a) Determine and graph the effects of the tariff on the following: (1) the price of
books in each country; (2) the quantity of books supplied and demanded in each country; (3) the volume of trade.
(b) Determine the effect of the tariff on the welfare of: (1) Home import-competing
producers; (2) Home consumers; (3) the Home government.
(c) Show graphically and calculate the terms of trade gain, the efficiency loss, and the total effect on welfare of the tariff .
4. Suppose Foreign had been a much larger country, with the following demand and supply curves:
D* = 500 − 100P ;
S* = 300 + 100P
Recalculate the free trade equilibrium and the effects of a 0.25 specific tariff by Home. Relate the difference in results to the discussion of the small-country case.
5. Return to the set-up of Problem 2. Starting from free trade, assume that Foreign offers exporters a subsidy of 0.25 per unit. Calculate the effects on the price in each country and on welfare, both of individual groups and of the economy as a whole.
2023-03-18