intltrade hw2 ch5 6answers fall2013

7/24/2019 Intltrade Hw2 Ch5 6answers Fall2013

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International Trade

Homework #2

(Chapters 5&6)

Ch 5: 2, 3, 5

Ch 6: 1, 2, 5

Ch 5:

2. The definition of cattle growing as land intensive depends on the ratio of land to labor used in

production, not on the ratio of land or labor to output. The ratio of land to labor in cattle exceeds the

ratio in wheat in the United States, implying that cattle is land intensive in the United States. Cattle is

land intensive in other countries as well ifthe ratio of land to labor in cattle production exceeds the ratio

in wheat production in thatcountry. Comparisons between another country and the United States is less

relevant for this purpose.

3. The worlds poorest countries cannot find anything to eport. There is no resource that is a!undant "

certainly not capital nor land, and in s#all poor nations not e$en la!or is a!undant.% &iscuss

This 'uestion is si#ilar to an issue discussed in Chapter (. )hat #atters is not the a!solute a!undance of factors,

!ut their relati$e a!undance. *oor countries ha$e an a!undance of la!or relati$e to capital when co#pared to

#ore de$eloped countries. +or ea#ple, consider a large, rich country lie the -nited tates and a s#all, poor

country lie /uate#ala. Though the -nited tates has #ore land, natural resources, capital, and la!or than/uate#ala, what #atters for trade is the relati$e a!undance of these factors. The ratio of la!or to capital is liely

to !e #uch higher in /uate#ala than in the -nited tates, reflecting a relati$e scarcity of capital in /uate#ala and

a!undance in the -nited tates. This #aes la!or relati$ely cheaper and capital #ore epensi$e in /uate#ala

than in the -nited tates. 0otice that this difference in factor prices is not dri$en !y how #uch la!or /uate#ala

has co#pared to the -nited tates, !ut !y the proportion of la!or to other factors.

5. ecently, co#puter progra##ers in de$eloping countries such as ndia ha$e !egun doing wor for#erly

done in the -. This shift has undou!tedly led to su!stantial pay cuts for so#e progra##ers in the -. ow

is this possi!le when the wages of silled la!or are rising in the - as a whole4 )hat argu#ent would trade

econo#ists #ae against seeing these wage cuts as a reason to !loc outsourcing of co#puter

progra##ing4

Specifc programmers may ace wage cuts due to the competition rom India, but this

is not inconsistent with skilled labor wages rising. By making programming more

ecient in general, this development may have increased wages or others in the

sotware industry or lowered the prices o the goods overall. In the short run, though,

it has clearly hurt those with sector specifc skills who will ace transition costs. There

are many reasons to not block the imports o computer programming services or

outsourcing o these !obs". #irst, by allowing programming to be done more cheaply, it

e$pands the production possibilities rontier o the %S, making the entire country


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better o& on average. 'ecessary redistribution can be done, but we should not stop

trade which is making the nation as a whole better o&. In addition, no one trade policy

action e$ists in a vacuum and i the %S blocked the programming imports, it could lead

to broader trade restrictions in other countries.

Ch 6:

1. Assume that orwa! and "weden trade with eah other$ with orwa! e%portin 'ish to "weden and

"weden e%portin olos (ars) to orwa!. Illustrate the ains 'rom trade *etween the two ountries

usin the standard trade model$ assumin 'irst that tastes 'or the oods are the same in *oth

ountries$ *ut the prodution possi*ilities 'rontiers di''er+ orwa! has a lon oast that *orders on

the north Atlanti$ makin it relatiel! more produin in 'ishin. "weden has a reater endowment

o' apital$ makin it relatiel! more produtie in ars.

'ote how welare in both countries increases as the two countries move rom

production patterns governed by domestic prices dashed line" to production patterns

governed by world prices straight line".

2. In the trade senario in ,ro*lem 1$ due to oer'ishin$ orwa! *eomes una*le to ath the -uantit!

o' 'ish that it ould in preious !ears. This hane auses *oth a redution in the potential -uantit!

o' 'ish that an *e produed in orwa!$ and an inrease in the relatie world prie 'or 'ish$ ,',a.

A. "how how the oer'ishin pro*lem an result in a deline in wel'are 'or orwa!.

/. Also show how it is possi*le that the oer'ishin pro*lem ould result in an inrease in wel'are'or orwa!.


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In panel a, the reduction of Norways production possibilities away from fish cause the production of

fish relative to automobiles to fall. Thus, despite the higher relative price of fish exports, Norway moves

down to a lower indifference curve representing a drop in welfare.

In panel b, the increase in the relative price of fish shifts causes Norways relative production of fish to

rise (despite the reduction in fish productivity). Thus, the increase in the relative price of fish exports

allows Norway to move to a higher indifference curve and higher welfare.

5. 0apan primaril! e%ports manu'atured oods$ while importin raw materials suh as 'ood and oil.

Anal!e the impat o' 0apans terms o' trade o' the 'ollowin eents+ (no raphs needed$ 3ust write

what happens)

A. A war in the 4iddle ast disrupts oil suppl!.

/. orea deelops the a*ilit! to produe automo*iles that it an sell in Canada and the 7".

C. 7" enineers deelop a 'usion reator that replaes 'ossil 'uel eletriit! plants.

8. A harest 'ailure in 9ussia.

. A redution in 0apans tari''s on imported *ee' and itrus 'ruit.

The terms o trade o (apan, a manuactures )" e$porter and a raw materials *"

importer, is the world relative price o manuactures in terms o raw materials p)+p*".

The terms o trade change can be determined by the shits in the world relative supply

and demand manuactures relative to raw materials" curves. 'ote that in the

ollowing answers, world relative supply *S" and relative demand *" are always )

relative to *. -e consider all countries to be large, such that changes a&ect the world

relative price.

a" il supply disruption rom the )iddle /ast decreases the supply o raw materials,

which increases the world relative supply. The world relative supply curve shits out,

decreasing the world relative price o manuactured goods and deteriorating (apan0s

terms o trade.

b" 1orea0s increased automobile production increases the supply o manuactures,which increases the world *S. The world relative supply curve shits out, decreasing

the world relative price o manuactured goods and deteriorating (apan0s terms o

trade.

c" %.S. development o a substitute or ossil uel decreases the demand or raw

materials. This increases world * and the world relative demand curve shits out,

increasing the world relative price o manuactured goods and improving (apan0s terms

o trade. This occurs even i no usion reactors are installed in (apan since world

demand or raw materials alls.d" 2 harvest ailure in *ussia decreases the supply o raw materials, which increases


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the world *S. The world relative supply curve shits out. 2lso, *ussia0s demand or

manuactures decreases, which reduces world demand so that the world relative

demand curve shits in. These orces decrease the world relative price o

manuactured goods and deteriorate (apan0s terms o trade.

e" 2 reduction in (apan0s tari& on raw materials will raise its internal relative price o

manuactures. This price change will increase (apan0s *S and decrease (apan0s *,

which increases the world *S and decreases the world * i.e., world *S shits out and

world * shits in". The world relative price o manuactures declines and (apan0s

terms o trade deteriorate.

intltrade hw2 ch5 6answers fall2013

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