Question 1

Assume that the U.S. imports only 1 iPhone, and does not import anything else.

(1) According to the official trade statistics, how much does the U.S. import from South Korea? Why?

(2) What is South Korea's value added (in dollar values) in U.S. imports?

Question 2.

Consider the following Ricardian model.

MPL                                        Labor Force

Apples                 Bananas

France         2                           3                                     100

Italy            1                           2                                      180

Please show your steps so that we can give you partial credits.

(1) Italy has the absolute advantage in bananas because its max banana output is 360, while the French max banana output is only 300. True or false? Why?

(2) Draw the PPF for Italy. Label the slope of the PPF and the max outputs of apples and bananas.

(3) Calculate the opportunity cost of apples (in terms of bananas) for France and Italy.

(4) What is the min and max value of P_apples/P_bananas under the free-trade equilibrium?

(5) Show that Italy gains from trade using a graph with its PPF and CPF. You can draw this in the same picture as in question (2) above, or draw another picture.

(6) What is the terms-of-trade (TOT) for Italy?

(7) Calculate the real wage for apples in Italy under free trade.

(8) How does your answer in (7) compare with the real wage for apples in Italy under closed economy? What does this comparison mean?

(9) How does your answer to (7) relate to Italy's TOT? What is the intuition of this relationship?

(10) Calculate the ratio of French wage with respect to Italian wage.

Question 3. Consider the following Ricardian model. Country U produces oil and cars using labor. The marginal products of labor for cars and oil are both constant.

(1) What is the percentage change of the wages of oil-producing workers in country U, other things equal?

(2) What is the percentage change of the real wage in terms of oil in country U, other things equal?

(3) What is the percentage change of the wages of oil-producing workers in country U, other things equal?

(4) What is the percentage change of the real wage in terms of oil in country U, other things equal?

(5) Recently the world price has collapsed in the world market. Economist Joe's job is to figure out the impact of this drop in oil prices on the U.S. economy. Which of the scenarios in (1)-(4) above is the most useful for Joe? Please explain your reasons.

Question 4. Short Essay: While exports are good for the U.S. economy (e.g. raising demand for U.S. products and wages of American workers), imports are bad: they destroy American industries and American jobs and lower our standards of living.