1. In this question, you are asked to find some international trade data. Go to UNCTAD's website http://www.unctad.org/ and choose 'Statistics', then 'Data Center'. Download the data for values and shares of merchandise exports and imports' under the 'Trade Trends'. What is the share of exports by developing economies in the world exports? What is the share of middle income countries? How much of the exports of NAFTA countries is done by Canada? You can find Canada by choosing 'Merchandise: Total trade and share, annual, 1948-2015', followed by 'NAFTA'. Compute these numbers for 1948, 1970, 1990, 2005, and 2016 and comment on the trends.
2. Suppose that there are two countries in the world, home country (H) and foreign country (F). There are two goods, cars (C) and TVs (T), and the only factor of production is labor (L). Two countries differ in their technology and labor productivity. Each worker in the home country can produce 6 cars or 4 TVs, while each worker in the foreign country can produce 2 cars and 3 TVs. Assume that both countries have 400 workers, where each worker is identical and able to freely choose between car production or TV production within their countries. The preferences in both countries are given by the utility function U(Qc, QT) = Qc0.5 QT0.5.
(a) First, consider the situation before the trade. Graph the production possibilities frontiers, and find the autarky relative price of cars in each country (Pc/PT).
(b) Which country has an absolute advantage in cars? Which country has comparative advantage in cars? Does foreign country have comparative advantage in any of the goods? Explain it in words.
(c) Solve for the autarky consumption level in both countries and show the autarky equilibrium in your graph.
(d) Now suppose that countries opened their borders to international trade. Construct the relative supply (RS) and relative demand (RD) curves in the world market. What is the equilibrium international price in the global market? Specify which country specializes and which country diversifies? Why?
(e) Find production and consumption levels for both home country and foreign country under the trade equilibrium.
(f) Explain the trade flows. Which country exports what?
(g) Find real wages in terms of both products (w/PC, w*/PC, w/PT, w*/PT) under autarky and under trade. Explain the impact of trade on real wages.
(h) Does each country gain from trade? Briefly explain why or why not.
3. Consider the following scenarios for the countries in question 2. Explain the impact of each scenario on (i) PPF in the home home country (ii) Autarky relative price of cars in the home country, assuming that everything else is the same.
(a) The number of workers doubles in the home country.
(b) There is technological progress, and therefore each worker in the home country can produce twice as many cars as before.
4. Now consider that, in question 2, the relative world demand for cars declined. Some of the consumers in both countries decided that they would like to walk to work, while they still would like to watch TV for entertainment. Therefore, the preferences are now U(Qc, QT) = Qc0.3 QT0.7.
(a) Find the real wages in both countries. Explain the sources of the wage difference between the two countries.
(b) Suppose now that each worker in the foreign country can produce 4 cars or 6 TVs, while the productivity in the home country remains the same. What is the real wage before and after trade in both countries? What explains the differences in wages?
(c) Comment on the following statement: "Trade between high-wage countries tends to be a modest win for all, or almost all, concerned...By contrast, trade between countries at very different levels of economic development tends to create large classes of losers as well as winners." - Paul Krugman, New York Times, 2007.1
5. Consider the world described in question 2. Now suppose that countries are concerned about jobs loss in the industry in which they have a comparative disadvantage. Therefore, they both passed a new law stating that half of each country's labor force must be used in each industry. In other words, half of home's labor must be used in producing cars and the other half must be used in producing TVs. The same is true for the foreign country. Under the new laws, how many cars and TVs each country will produce. Why? Does the law affect the expansion in consumption possibilities, and therefore utility gains by consumers?
1The article can be accessed at http://www.nytimes.com/2007/12/28/opinion/28krugman.html