Economics 111 - Principles of Economics - Accelerated Treatment Problem Set 9
Q1. Explain whether the following statement is true or false, and WHY: If there were no trade restrictions between the (high wage) United States and (low wage) Mexico, then Mexico would be able to produce virtually everything more cheaply than the United States, and workers would become permanently unemployed.
Q2. Which of the following conditions would work against the Heckscher-Ohlin theorem as an explanation for international trade? Explain briefly.
a) Language barriers prevent workers migrating from country to country.
b) Workers cannot move from one industry to another within a country.
c) All countries have identical endowments of all inputs.
Q3. Suppose that labor is the only factor of production in two countries, Bladia and Garumba. In Bladia, 10 pounds of apricots requires 4 hours of labor, and 10 pounds of apples requires 6 hours. In Garumba, 10 pounds of apricots requires 2 hours of labor, while 10 pounds of apples takes 4 hours.
a) Which country has the absolute advantage in which good?
b) What is the opportunity cost of a pound of apples in Bladia? in Garumba?
c) If trade takes place according to the principle of comparative advantage, what will each nation export?
Q4. The exchange rate between the US dollar and the Japanese yen is floating freely - both governments do not intervene in the market for each currency. Suppose a large trade deficit with Japan prompts the United States to impose quotas on certain Japanese products imported into the United States and, as a result, the quantity of these imports falls.
a) The decrease in spending on Japanese products increases spending on US made goods. Why? What effect will this have on US output and employment and on Japanese output and employment?
b) What happens to US imports from Japan when US output (or income) rises? If the quotas initially reduce imports from Japan by $25 billion, why is the final reduction in imports likely to be less than $25 billion?
c) Suppose the quotas do succeed in reducing imports from Japan by $15 billion. What will happen to the demand for yen? Why?
d) What will happen to the dollar-yen exchange rate? Why? (Hint: There is an excess supply of yen, or an excess demand for dollars). What effects will the change in the value of each currency have on employment and output in the United States? What about the balance of trade? (Ignore complications such as the J curve).
e) Considering the macroeconomic effects of a quota on Japanese imports, could a quota reduce employment and output in the United States? Have no effect at all? Explain.