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Review Answers.
Suppose that a country has a low trade to GDP ratio. What are some possible explanations for this? High trade barriers (see lecture notes on trade barriers)
Which of China, Denmark, and the US has a trade surplus? Which has a trade deficit?
China and Denmark has a surplus; the US has a deficit
Identify the type of FDI occurring in the following scenarios (H = horizontal, V = vertical, RV = reverse vertical)
a. An American company purchases a British soccer team: H
b. Ford Motor Company establishes a plant in Canada: H
c. GM opens a plant in India: V
d. BMW opens a plant in Bilbao, Spain: H
e. Ford Motor Company acquires British Firm Jaguar: H
f. Lenovo, a Chinese company, acquires IBM's personal computing business: RV
g. General Motors Corporation builds a plant in China to supply Buicks to the Chinese market.: H and V
Suppose that in retaliation to British limits on Balkan migrants, Bulgaria starts restricting British migrants in Bulgaria as a "reciprocal measure." Will this work? Why or why not? No. Not many British move to Bulgaria ‐ those that do don't go b/c of wage increases
i
Under the condition of no trade, which combination gives the nation the most utility? A
Under the condition of no trade, which combination of the following is not attainable? B&C
Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat with a day of labor. Without trade (in autarky), Home's daily production is 20 tons of wheat and 10 tons of corn. How large is Home's labor force? 20
In 2000 the U.S. terms of trade was 1. In 2006 the U.S. export price index was 1.15 and the U.S. import price index was 1.18.
1. T/F In 2006 the United States had to export 2% more in order to obtain the same amount of imports as in 2000. T
2. T/F In 2006 the United States could export 2% less to obtain the same of amount of imports as in 2000. F
3. T/F Prices of U.S. imports rose more rapidly than prices of U.S. exports. T
4. T/F The U.S. terms of trade improved between 2000 and 2006. F
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Last time...
Specific Factors model
Assumptions: Two goods: Agriculture and Manufacturing
Small, Open Economy: faces world prices:
Three factors: Land, Labor, Capital
y A  f ( Land , Labor )
yM  f (Capital , Labor )
MPLM
MPLA
LM
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LA
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The Specific Factors Model
Endowments : T Land, K capital, L Land
Output Pr ices:PA , PM
Factor Prices :w, rK , rT
yA  f t, l 
yM  g  k , l 
df df dg dg
 0 increasing
, , ,
dt dl dk dl
d 2 f d 2 f d 2g d 2g
 0 decreasing marginal products
,
,
,
dt 2 dl 2 dk 2 dl 2
d 2 f d 2g
 0 labor augments capital, vice versa.
,
dldt dldk
max k ,lM PM yM  wlM  rK k
max t ,lA PA y A  wl A  rT t
s.t.
s.t.
yM  g  k , lM 
yA  f  t, lA 
kK
t T
PAMPLA
PMMPLM
LA
LM
PMMPLM
LA
PAMPLA
PAMPLA
LM
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LA
Migration?
PMMPLM
LA
PAMPLA
LA
LM
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PAMPLA
Trade?
PMMPLM
PAMPLA
LA
LM
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What about Owners of Land?
max t ,lA PA y A  wl A  rT t
s.t.
yA  f t, lA 
t T
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Owners of Capital?
Real wage effects from trade (price of Ag decreases)
Sector Workers
Capital Owners
Agri
Manu
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Land Owners
Summary
Effects of Free Trade?
Ricardian: Specific Factors: Immobile Factors:
Mobile Factors: The OECD Employment Outlook in 2005 estimated that international trade accounted for up to 4 percent of all permanent layoffs in Canada, the US and the EU in 2000…
Denmark has cut its unemployment from about 10 percent in the early 1990s to less than 5 percent now. The main ingredient for the Danish success is a system called “flexicurity,” a set of liberal policies for hiring and firing, allowing relatively frictionless adjustment to shocks caused by international trade. A generous system of carefully monitored unemployment benefits and funding for retraining displaced workers complement Denmark’s labor‐market flexibility. Gustav Ranis
David Corderi
YaleGlobal, 10 August 2006
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Review Questions
Table: An Economy Before and After Trade
The top part of the table gives manufacturing and agricultural prices, production, resource
utilization, and resource payments in autarky (a no-trade situation). The bottom part of the table
provides (some of) the same information after trade occurs.
(Table: An Economy Before and After Trade) According to the table, what is
the return to capital after trade occurs?
(Table: An Economy Before and After Trade) Refer to the table provided.
What is the return to land after trade occurs?
(Table: An Economy Before and After Trade) Refer to the table provided.
Why does the return to capital change after trade occurs?
Consider a country with two factors of production (capital and labor) that makes two goods (X
and Y). Suppose that capital is specific to each good and is divided into two types, KWX and KWY.
How does this PPF compare to the PPF when capital is not specific? Now suppose that both
capital and labor are specific to the two goods. What does the PPF look like now? How does it
compare to the PPF when only capital is specific? How does it compare to the PPF when nothing
is specific?
In what way do the conclusions of the Ricardian and the specific-factors models differ?
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Heckscher‐Ohlin Are Factors truly specific?
yA  f t, l 
yM  g  k , l 
yM
yA
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Hecksher Ohlin Model
Assumptions:
Mobile factors
Free trade
Same technologies
Same preferences
The ratios of capital and labor differ in the two countries
Production of agriculture is labor intensive, Production of Manufactures is capital intensive:
For a given wage/rent ratio, the ratio of labor to capital demanded in the manufacturing sector is less than that in the agriculture sector
y A  f  k A , l A   k A , l A1
yM  g  kM , lM   k A  , l A1 
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w/r
Labor Demand
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