Download International Trade HW – Ch 7 – 8 Ch 7 The quantity of direct foreign

International Trade
HW – Ch 7 – 8
Ch 7
1.
The quantity of direct foreign investment by the US into Mexico has increased
dramatically during the last decade. How would you expect this increased quantity of FDI
to affect migration flows from Mexico to the US, all else being equal?
Direct foreign investment should reduce labor flows from Mexico into the United States because
direct foreign investment causes a relative increase in the marginal productivity of labor in
Mexico, which in turn causes an increase in Mexican wages, and reduces the incentive for
emigration to the United States.
2.
Which of the following countries would you expect to have intertemporal production
possibilities biased toward current consumption goods and which biased toward future
consumption goods?
A.
A country, like Argentina in the last century that has only recently been opened for
large-scale settlement and is receiving large inflows of immigrants.
B.
A country, like the UK in the late 19th century or the US today, that leads the world
technologically but is seeing that lead eroded as other countries catch up.
C.
A country that has discovered large oil reserves that can be exploited with little new
investment (like Saudi Arabia).
D.
A country that has discovered large oil reserves that can be exploited only with
massive investment (like Norway).
E.
A country like S. Korea that has discovered the knack of producing industrial goods
and is rapidly gaining on advanced countries.
Foregoing current consumption allows one to obtain future consumption. There will be a bias towards
future consumption if the amount of future consumption which can be obtained by foregoing current
consumption is high. In terms of the analysis presented in this chapter, there is a bias towards future
consumption if the real interest rate in the economy is higher in the absence of international
borrowing or lending than the world real interest rate.
(a) The large inflows of immigrants means that the marginal product of capital will rise as
more workers enter the country. The real interest rate will be high, and there will be a bias
towards future consumption.
(b) The marginal product of capital is low and thus there is a bias towards current
consumption.
(c) The direction of the bias depends upon the comparison of the increase in the price of oil
and the world real interest rate. Leaving the oil in the ground provides a return of the increase
in the price of oil whereas the world real interest rate may be higher or lower than this
increase.
(d) Foregoing current consumption allows exploitation of resources, and higher future
consumption. Thus, there is a bias towards future consumption.
(e) The return to capital is higher than in the rest of the world (since the country’s rate of
growth exceeds that of the rest of the world), and there is a bias toward future consumption.
3.
The Karma Computer Company has decided to open a Brazilian subsidiary. Brazilian
import restrictions have prevented the firm from selling into the market, while the firm
has been unwilling to sell or lease its patents to Brazilian firms because it fears this will
eventually hurts its technological advantage in the US market. Analyze Karma’s decision
in terms of the theory of multinational enterprise.
In terms of location, the Karma company has avoided Brazilian import restrictions. In terms of
internalization, the firm has retained its control over the technology by not divulging its patents.
Ch 8
1.
Home’s demand curve for wheat is:
Its supply curve is:
D=100-20P
S=20+20P
Derive and graph Home’s import demand schedule. What would the price of wheat be in
the absence of trade?
The import demand equation, MD, is found by subtracting the home supply equation from the home
demand equation. This results in MD 80 – 40 P. Without trade, domestic prices and quantities
adjust such that import demand is zero. Thus, the price in the absence of trade is 2.
2.
Now add Foreign, which has a demand curve of: D*=80-20P
And a supply curve of: S*=40+20P
a.
Derive and graph Foreign’s export supply curve and find the price of wheat that
Foreign would have with no trade.
b. Now allow Foreign and Home trade with each other with zero transportation cost.
Find and graph the equilibrium under free trade. What is the world price?
What is
the volume of trade?
(a) Foreign’s export supply curve, XS, is XS –40 40 P. In the absence of trade, the price is 1.
(b) When trade occurs export supply is equal to import demand, XS MD. Thus, using the equations
from problems 1 and 2a, P 1.50, and the volume of trade is 20.
3.
Home imposes a specific tariff of .5 on wheat imports.
A.
Determine and graph the effects of the tariff on:
i.
The price of wheat in each country
ii.
The quantity of wheat supplied and demanded in each country
iii.
The volume of trade.
B.
C.
Determine the effect of the tariff on the welfare of each of the following:
i.
Home import-competing producers
ii.
Home consumers
iii.
The home government.
Show graphically and calculate the terms of trade gain, the efficiency loss and the
total effect on the welfare of the tariff.
(a) The new MD curve is 80 – 40 (P t) where t is the specific tariff rate, equal to 0.5. (Note: in
solving these problems you should be careful about whether a specific tariff or ad valorem tariff is
imposed. With an ad valorem tariff, the MD equation would be expressed as MD 80 – 40 (1 t)P).
The equation for the export supply curve by the foreign country is unchanged. Solving, we find that
the world price is $1.25, and thus the internal price at home is $1.75. The volume of trade has been
reduced to 10, and the total demand for wheat at home has fallen to 65 (from the free trade level of
70). The total demand for wheat in Foreign has gone up from 50 to 55.
(b) and (c) The welfare of the home country is best studied using the combined numerical and
graphical solutions presented below in Figure 8.1.
where the areas in the figure are:
a: 55(1.75 – 1.50) –0.5(55 – 50)(1.75 – 1.50) 13.125
b: 0.5(55 – 50)(1.75 – 1.50) 0.625
c: (65 – 55)(1.75 – 1.50) 2.50
d: 0.5(70 – 65)(1.75 – 1.50) 0.625
e: (65 – 55)(1.50 – 1.25) 2.50
Consumer surplus change: –(a b c d) –16.875. Producer surplus change: a 13.125.
Government revenue change: c e 5. Efficiency losses b d are exceeded by terms of trade gain e.
[Note: in the calculations for the a, b, and d areas a figure of 0.5 shows up. This is because we are
measuring the area of a triangle, which is one-half of the area of the rectangle defined by the product
of the horizontal and vertical sides.
4.
Use your knowledge of trade policy to evaluate the following statements:
A.
“An excellent way to reduce u7nemployment is to enact tariffs on imported goods.”
B.
“Tariffs had a more negative effect on welfare in large countries than in small
countries.”
C.
“Automobile manufacturing jobs are leaving to Mexico because wages are so much
lower there than in the US. As a result, we should implement tariffs on autos equal
to the difference between US and M3exican wage rates.”
(a) False, unemployment has more to do with labor market issues and the business cycle than with
tariff policy.
(b) False, the opposite is true because tariffs by a large countries can actually reduce world prices
which helps offset their effects on consumers.
(c) This kind of policy might reduce automobile production and Mexico, but also would increase the
price of automobiles in the United States, and would result in the same welfare loss associated with
any quota.