Download Chapter One Comparative Advantage -

International Trade
Exercises
Cheng ming, College of Economics
Shanghai University
1
Chapter One Comparative Advantage -- the Ricardian Model
1. Suppose Home country has 1000 units of labour, and Foreign country has 1200
units of labour, both of the two countries produce bicycle and skateboard. Home
country can produce one unit of bicycle with 2 units of labour, and one unit
skateboard with 5 units of labour. Foreign country can produce either one unit of
bicycle or skateboard with 3 units of labour.
(1) Draw the production possibility frontier for both of the two countries.
(2) Without trade, what is the relative price of bicycle in terms of skateboard for the
two countries?
(3) Draw the consumption possibility of the two countries after trade.
2. Suppose both Home country and Foreign produce the following 4 products, the
labor units needed in the production of each unit of the product is reflected in the
following table:
Product
A
B
C
D
Home Labour Input
1
2
4
15
Foreign Labour Input
12
18
24
30
(1) For Home country, which product has the biggest advantage, which has the least
advantage?
(2) If the wage of Home country is 8 times as high as that of Foreign. Which
product(s) will be produced in Home country, and which product(s) by Foreign?
(3) Please explain how the two countries can be benefited form the specialization
and trade.
(4) If the wage of Home country is 6 times higher than that of the Foreign. The
mode of specialization and trade pattern will be changed? If so, how?
(5) What are the possible reasons in the reality that the mode of specialization is not
exactly the same with the theoretical mode reflected in (2)?
3. "The wage of Korean workers is US$2.50 per hour, if Korean products are allowed
to export freely to the U.S.A., the wage of the American workers will be reduced to
the same level. Is it impossible for you to import only a 5 dollar T-shirt, without
import the related wage rate of 2.50 dollar?". Please comment.
2
Chapter Two
Specific Factors and Income Distribution
1. Suppose China has two departments: food -- with land as its specific factor, and
manufactures -- with capital as its specific factor. Because of the good weather, China
has a bumper harvest of agricultural products, and the food price drop by 8%
accordingly.
(1) Draw a figure to reflect the influence on the labour demand by the two
departments.
(2) Is there any influence on wages?
(3) Is there any changes of labour allocation in the two departments? Any changes of
output of each department?
(4) What are the possible influence on the production mix due to the changes of
relative price?
(5) What are the influences on the income distribution for capital owners and land
lords because of the declining of the relative price of food?
(6) What are the possible influence on the workers' income, given that food is the
most important part of consumption?
2. In 1986, the price of petroleum was dramatically declined. Since the USA is a
petroleum importing country, many people thought it would be helpful for the USA.
However, two American states - Texas and Louisiana witnessed a great economic
depression.Why?
3. In the manufacturing department, the Japanese productivity is nearly the same with
that of the American's. While in the USA, the productivity in the service sector is still
much higher. Many people think that it is a problem for the States, since most of the
service products are non-tradable. It means that the USA is not possible to sell their
products with which it has the comparative advantage. Please argue.
3
Chapter Three Resources and Trade -- the Heckscher - Ohlin Model
1. One country has 400 units of labour and 600 units of land, and it produces two
products - wine and cheese. With one unit output of wine, it needs 10 units of labour
and 5 units of land, while for cheese, it needs 4 units of labour and 8 units of land.
(1) What is the intensive factor for the production of wine and cheese, respectively?
(2) Whether the country can produce 90 units of wine and 50 units of cheese with its
resources? Why?
(3) Draw the production constraint due to the restrictions of land and labour.
(4) If the labour suppler increases to 100 units, what will be the changes for the
constraint in (3)?
2. Producing one unit of wheat needs 9 units of land and 3 units of labour, while for
one unit of cloth needs 1 unit of land and 6 units of labour. Suppose the economy has
altogether 120 units of labour and 180 units of land.
(1) Draw the production possibility frontier of this economy.
(2) If the suppler of land is increased by 90 units, will be any change for the PPF?
What does it imply?
3. Suppose under the prevailing prices of factors, in the production of cloth, with
additional one acre of land, 20 hrs of labour are needed. While in the production of
food, one acre of land needs only 5 hrs of labour.
(1) If the economy has 600 hrs of labour and 60 acres of land. Please draw a figure
to show the allocation of resources.
(2) If the supply of labour is increased to 800 hrs, and then to 1000 hrs, and further
to 1200 hrs, please use Edgeworth Box Charts to illustrate the locus of the changes of
resources allocation.
(3) What will be the case if the supply of labour continues to increase?
4. Both country A and B have two factors of production: Capital and Labour,
producing two products: X and Y. The two countries have the same level of
technology, X is the capital intensive product, country A is capital abundant. Please
make an analysis for the changes of terms of trade and the welfare for the two
countries:
(1) The stock of capital increases in country A
(2) The supply of labour increase in country A
(3) The stock of capital increases in country B
(4) The supply of labour increases in country B
4
Chapter Four The Standard Trade Model
1. Japan exports manufactured goods and imports raw materials, such as petroleum
and food. Analyse the changes of the terms of trade for Japan in the following
conditions:
(1) Supply of petroleum is limited because of Middle East War.
(2) Korean increases its capacity in the production of automobiles and sells the
products in the markets of the USA and Canada.
(3) The American engineers establish the nuclear reactors to replace petroleum
power station.
(4) The Russian have a poor harvest of agricultural products
(5) Japan reduces the import duty for orange and beef.
2. Suppose a country offers subsidies to its export products, while another country
increases the import duty in order to offset the influence created by the subsidies.
With the import duty, the relative price of importing country remains the same. Is
there changes of the terms of trade and welfare for the two countries?
3. If the importing country offers the subsidies to its export products, what would be
the situation?
4. With the economic development, the terms of trade for the country may either be
improved or deteriorated. There are still many specialists, however, do not think that
the immiserizing growth would probably happen. Why?
5
Chapter Five Economies of Scale, Imperfect Competition
1. Please point out whether it is internal or external economy of scale.
(1) Most of orchestral music instruments are manufactured in Louisiana by a dozen
more factories.
(2) All Japanese Honda automobiles being sold in the States are either imported from
Japan or manufactured in Ohio.
(3) All the Airbus planes are being assembled in France.
(4) The state of Connecticut has become the insurance center in the Northeast part of
the United States.
2. Under the full competition circumstances, the pricing strategy of the manufacturer
is based on the marginal cost. Is this not true when there is internal economy? Why?
3. In Japan, there are some shops specialized in the selling of Japanese products
bought back from the States, and there prices are cheaper than those in the formal
Japanese shops. What are the possible reasons?
4. Please comment the relative importance between the economies of scales and
comparative advantages for the following situations.
(1) Most of the alumnus in the World are melted either in Norway or in Canada.
(2) More than half of World's jet airplanes are manufactured in Seattle.
(3) Most of the semiconductors are manufactured in the States and Japan.
(4) Most of the Scotch Whisky come from the Scotland.
(5) Many best wines come form France.
6
Chapter Six
International Factor Movements
1. Home country produces food with two factors of land and labour:
(1) If the supple of land is constant, what will be the the production function of
food?
(2) What are the possible reasons to explain the shape of the production function?
(3) Let the marginal product of labour be as follows:
Labour
Marginal
Product (yuan )
1
12
2
10
3
8
4
6
5
4
6
2
(A) If the owner of land hires two workers, what is wage should be paid? What is the
rent received by the landlord?
(B) If the owner of land hires additional four workers, what will be the actual wage
rate, overall wages and rent?
2. Which of the following situations is of international direct investment?.
(1) McDonald's opened a new outlet in Moscow.
(2) A Canadian investor acquired an American franchise shop.
(3) Japanese investors bought a lot of stocks of NY Rockefeller Center.
(4) The International Monetary Fund offered lending of 50 million U.S. Dollars to
Poland.
(5) Carbide limited established a chemical plant in India.
2. Under the following situations, which country will be biased toward current
consumption, and which country will be biased toward future consumption in the
intertemporal trade?
(1) Argentina and Canada did not open their doors until recently, and continue to
accept the immigrants.
(2) The U.S.A. today take the lead in the World's science and technology, however,
its leading position is gradually declining.
(3) A country like Saudi Arabia, can fetch the oil with little investment.
(4) A country like Noway, has to invest greatly in order to develop the oil in the
North Sea.
(5) A country like Korea, is catching up with the developed countries with its
technologies.
7
Chapter Seven The Instrument of Trade Policy
1. A country would like to encourage the development of its own digital big screen
TV set. Suppose this kind of TV is very expensive, with the price of 6500 US dollar
per set. The overall cost of spare parts for each set is 3000 US dollars, while the price
of a set imported from abroad is 5000 US dollars.
(1) From the viewpoint of protection of infant industry, do you think it is necessary
to impose the Ad Volerem duty? What will be the rate of import duty?
(2) What is effective rate of protection for the domestic TV industry under this
nominal rate of protection?
(3) Who are benefited from the protection? Who are the losers?
2. Home country has a demand curve for wheat D = 100 - 20P, and supply curve S =
20 + 20P. Please draw the demand curve for import. Without trade, what is the price
for wheat?
3. In the above case, Foreign country is introduced. The demand curve is D* = 80 20P, and supply curve is S* = 40 + 20P.
(1) What is the export supply curve for Foreign? Also, calculate the wheat price of
Foreign country before trade.
(2) Now with trade, and let transportation cost equals to zero, what is the equilibrium
point under the free trade? What is the correspondent World's price and trade volume?
4. Suppose Foreign is a small country, it produces and exports automobiles with the
selling price of 8000 US Dollars per set in the international market.
(1) If a small importing country impose a 25% Ad Volerem duty, what will be the
influence on the price of automobiles?
(2) If the importing country is big, what would be the consequence?
(3) What are the possible groups will be affected by the import duty?
(4) Why the protection cost of the States is relatively lower than that of the other
countries?
8
Chapter Nine Trade Policy in Developing and Developed Countries
1. Suppose the demand and supply of a small country for cloth reflected as follows:
Price(Pc/Pw)
Supply(meters)
Demand(meters)
2
20
100
3
40
80
4
60
60
5
80
40
Under free trade, Pc/Pw = 2 US Dollars
(1) Suppose the importing country impose an import duty of 50%, what will be the
new demand and supply for cloth with the new price? What is the influence on the tax
revenue?
(2) What is the prohibitive import duty rate for cloth?
2. Discuss the following issues:
(1) What are the reasons that foreign trade is not the engines for economic growth
for most of the developing countries?
(2) Put forward some of the suggestions for the developing countries to overcome
the difficulties in the foreign trade.
3. What are the reasons to explain the import substitution policy is more successful in
some of the big developing countries, such as Brazil, than the small one, like Ghana?
4. A country is importing automobiles from abroad with the price of 8000 US dollars
each. The government believes that the domestic manufactures can produce at the cost
of 6000 US dollars after a period of time. However, with this interim period, the cost
of domestic producers will have the cost of production as high as 10000 US dollars
each.
(1) Suppose all the domestic manufactures will have a period of adjustment in order
to ride down the initial high cost, under what situations the policy of the infant
industry protection is necessary?
(2) Now we suppose one of the domestic manufacture is able to reduce the cost of
production to 6000 US dollars per set after bearing the initial learning cost, and other
manufacturers can easily imitate and produce the products at the same cost. Please
explain how can it be harmful toward the domestic industrial development? Is it
effective to use the infant industry policy to avoid such situation?
9