International Econ test 1

Welfare concepts: consumer and producer surplus

*Consumer surplus is a welfare measure of demand.* - Assume there are many consumers and they differ in their marginal valuations of (or willingness to pay for) this good. Ranking the consumers according to their marginal willingness to pay, *each point on the demand curve measures the willingness to pay of the marginal consumer.* *Producer surplus is a welfare measure of supply.* - Assume producers differ in their marginal costs of producing the good. Ranking producers according to their marginal costs, *each point on the supply curve captures the minimum price necessary to cover the marginal costs of production.*

Theory of Comparative advantage

2 main predictions and gains: 1)Since (autarky) market prices measure an economy's opportunity costs, the theory of comparative advantage predicts that an economy should export goods where it has a low opportunity cost (or autarky price) and import goods where it has a high opportunity cost (or autarky price). 2) Trade in the direction of comparative advantage yields economy-wide gains from trade in the form of achieving consumption opportunities outside an economy's PPF. Gain means you had opportunities that you didn't have before (having more choices, having the ability to colosseum outside your PPF, etc.) very vital to economic because it is expressed in terms of the versatile concept of opportunity costs. Every society needs to make choices and opportunity costs measure what has to be given up if "one road is taken".

Opportunity costs and the incentives to trade

A comparison of its opportunity costs with market prices will determine what a family will buy or sell on the market. A family will sell the good in which it has a lower opportunity cost than the market price and buy the good in which it has a higher opportunity cost tha the market price. A family's opportunity costs determine its comparativeadvantage and specialization. The supply and demand of all market participants determines the market price

comparative advantage and the gains form trade

A farm family has a comparative advantage in the good where it has a lower opportunity cost relative to what the market has to offer. Specialization in the direction of comparative enables the family to obtain a higher standard of living (i.e. obtaining more of each good) than under self-sufficiency. Graphically, the gains from trade can be characterized by having access to consumption points that are outside a families PPF.

The theory of comparative advantage predicts the following: An economy should export the good with a relatively high opportunity cost An economy should export the good with a relatively low autarky price An economy should export the good with a relatively low opportunity cost An economy should import the good with a relatively high autarky price.

An economy should export the good with a relatively low autarky price An economy should export the good with a relatively low opportunity cost An economy should import the good with a relatively high autarky price. Note: The economy should export the good with a relatively low opportunity cost or autarky price and import the good with a relatively high opportunity cost or autarky price. Note that the relative autarky price is the opportunity cost.

A question with ONE correct answer. Which is a good measure of an economy's openness? An economy's GDP. An economy's total trade. An economy's (export/GDP) An economy's (import/GDP) An economy's (total trade/GDP)

An economy's (total trade/GDP) Note: the first two measure economic size; because total trade includes imports and exports, (total trade/GDP) is a better measure.

A question with MULTIPLE possible answers. Decide which of the following items are real capital: A stock of Apple corporation. A bond issued by Apple corporation. An oven used by the local pizzeria. The SIS building.

An oven used by the local pizzeria. The SIS building. Note: the first two are examples of financial capital, not real capital.

The following statements pertain to the concept of arbitrage. Arbitrage results in a divergence of prices between different locations Arbitrage provides the incentives for trade in non-competing goods Arbitrage is the process of buying a good in a low-cost location and selling the same good in a high-cost location Arbitrage provides the incentives for trade in competing goods

Arbitrage is the process of buying a good in a low-cost location and selling the same good in a high-cost location Arbitrage provides the incentives for trade in competing goods Note: Arbitrage provides the incentives for trade in competing goods and causes price convergence, not divergence. It is the process of buying a good in a low-cost location and selling it in the high high-cost location, causing prices to converge (not diverge)

Consider the specific factor model we discussed in class. Assume that timber and cotton are produced from labor, capital and land, where labor is mobile, capital is specific to the production of cotton and land is specific to the production of timber. Starting from an equilibrium, assume now that the price of timber, PT has decreased while the price of cotton, PC has remained the same. Which statement is true regarding how the price change will affect the diagram. Because PT has decreased, the curve PCMPLC will shift inwards towards the vertical (cloth) axis, causing an increase in the equilibrium wage. Because PT has decreased, the curve PTMPLT will shift outwards (away) from the vertical (timber) axis, causing an increase in the equilibrium wage. Because PT has decreased, the curve PTMPLT will shifted inwards towards the vertical (timber) axis, causing a decline in the equilibrium wage. The box has decreased by the change in PT.

Because PT has decreased, the curve PTMPLT will shifted inwards towards the vertical (timber) axis, causing a decline in the equilibrium wage.

Although the nominal wage has increased for all workers after new equilibrium, what is the effect on the real wage?

Because we just have two industries; there are again two real wages: (i) the real wage in terms of manufacturing W/PM and (ii) the real wage in terms of agriculture W/PA. Since we assumed that PA has not changed, a rise in W leads to *a rise of the real wage in terms of agriculture W/PA — workers can buy more of A.* Real wage goes down for the good that's price goes up b/c initial price change is > change in equilibrium wage

A question with ONE correct answer Which country of the world economy invested the most in container technology since the beginning of the 21st century? Russia China United Kingdom India

China Note: China's economic export boom was triggered by its investment in container infrastructure.

Overall effects of FDI

FDI increases the nominal and real wages of domestic workers. FDI decreases the nominal and real earnings of domestic landowners. FDI decreases the nominal and real earnings of domestic capital owners. FDI increases the output of manufacturing, but decreases the output of agriculture.

Tariff and quotas (introduction)

Governments use different instruments of trade policy and we discuss two widely used instruments: *import tariffs* - tax on imports *import quotas* - tax on quotas with imports, the world price is lower than the domestic price, and tariffs increase the price --> they have a comparative disadvantage in what they import

Improved or deteriorating terms of trade or market prices

If the relative price of the specialized commercial crop increases, the farm family experiences an *improved terms of trade* and a welfare gain. If the relative price of the specialized commercial crop decreases, the farm family experiences a *deteriorating terms of trade* and a welfare loss. The danger of complete specializations that strongly deteriorating terms of trade can make the farm family worse off than under self-sufficient or autarkic farming. Dangers form extreme specialization becuase terms of trade can change

Import demand curve

Import demand curve is derived from the supply and diamond diagram No import demand if world price = domestic autarky price If world price goes down, then there is a difference in supply and demand and import demand is the excess demand that will come from the domestic market

The big technology change of the 20th century: the global container revolution

In the 1950s Malcom McLean came up with an idea for standardized shipping containers. In the 1960s they become standardized in US ports and then became global. Key insight: Before the container revolution, ocean shipping made up only about a quarter of total (producer to customer) shipping costs There was uncertainty abotu how successful it will be and many large ports exited the market *Effects of containerization*: - Containerization connected the different parts of shipping and production lines - reimagined shipping - By integrating the different modes of transport (sea, rail and truck), containerization dramatically cut down door-to-door transport costs - The container revolution together with the internet enabled the world-wide fragmentation of production: buy or produce the components of a product where it --> lead to rise of China

Changes in land earnings (graphical analysis shift in equilibrium to increase M)

Since workers have left the agricultural sector, agricultural output and revenue has declined (movement from point A to point B). In Addition, workers' wages have increased from W0 to W1. The loss in land earnings captured by the dotted area (between points A, B, W1 and W0) Alternatively,we can examine land earning by considering the effects on the marginal productivity - because workers move out of agg, and price of agg has not changed, then the nominal earnings of land will fall and. *Land owners clearly worse off in nominal and real terms.*

how trade impacts prices (graph)

The Autarky price is determined by domestic supply and domestic demand -- typical supply and demand curve the world price is a horizontal line n below equilibrium --> it creates a shortage (demand is greater than supply at that price) and the difference between those who lines at the world price is the quantity of goods important Welfare for consumers increases with lower prices Welfare for producers decreases with lower prices

The 19th century opening up of Japan provides a natural experiment to test the theory of comparative advantage for the following reasons: The early Meiji era reforms played a crucial role in defining this natural experiment. Japan opened up to international trade, migration and foreign direct investment The case of Japan provides an unusual opportunity to observe a market economy with and without international trade, other things held constant Japan opened up just to international trade

The case of Japan provides an unusual opportunity to observe a market economy with and without international trade, other things held constant Japan opened up just to international trade Note: Review the lecture notes that explain why it is a natural experiment. The Meiji era reforms had nothing to do with the natural experiment. Because Japan opened up only to trade, one can examine the effect of trade.

Foreign Direct Investment (FDI) (introduction)

There are two forms of FDI: 1) Greenfield FDI : a firm builds a new plant in a foreign country 2) Acquisition (or Brownfield) FDI: a firm buys an already existing foreign plant. --> e.g. flow of investment into Eastern Europe due to privatization. We focus on Greenfield FDI. Furthermore, we assume that capital moves from high-wage to low-wage economies to earn a higher rental rate because of the assumed relative capital scarcity in the low-wage economy.

consumer surplus and producer surplus together

is the market price increase, CS decrease and PS increases --> move in opposite directions

Erika would be willing to pay up to $600 for a specific iPhone, but then she buys it for $500. What is her consumer surplus in $?

$100

Tariff analysis (intro, types of tariffs) Q1: if autakry price is $150 and world price is $100, how high depose the tariff have to be to elimtiate trade barrirors?

*We examine the impact of a tariff on consumer and producer welfare/surplus, government revenue and the economy as a whole* 2 types of tariffs: - Specific tariff: Charged per unit of quantity; e.g., 12.38 cents per pound of sugar imported. - Ad valorem tariff: Charged as a fraction of value; e.g., 10% of the invoice value. Without a tariff, domestic consumers and domestic producers would face the world price PW (free trade regime). Under a tariff, domestic consumers and producers will face a price different than the world price. A1: $50 the higer the tariffs the higher degrees of trade restricitons

2 types of trade

1) Trade of goods that can't be produced where they are consumed, which is called trade in *non-competing goods* - Comparative advantage does not apply to these types of goods because comparative advantage implies the good can be produced at home while non-competing goods have value because they can only be obtained in certain foreign places 2) Trade of goods that could be produced where they are consumed, which is called trade in *competing goods* Where comparative advantage was developed because they could be produced in multiple places

A US worker can produce 4 cars per year or 10 tons of grain per year. Assume that the US has 100 million workers. Decide which of the following production points are on the production possibilities frontier for the US. 1000 million tons of grain per year 4000 million tons of grain per year 400 million cars per year 4 million cars per year.

1000 million tons of grain per year 400 million cars per year Note: The points on the US PPF are (i) 4x100million=400 million cars per year and (ii) 10x100 million=1,000 million tons of grain per year.

A question with ONE correct answer. When was the beginning of the global container age? 1956 1966 1973 1983

1966 Note: 1966 the first international container shipments from the US to western Europe.

Deadweight losses form a tariff

A tariff results in a production and a consumption deadweight loss (DWL). DWLs are part of the loss of consumer surplus. But since these losses are not transferred to domestic producers or the government, they are a welfare loss to the nation. Consumption deadweight loss d: Consumers between D2 and D1 have left the market and their consumer surplus has gone with them. Production deadweight loss b: The tariff has encouraged relative inefficient domestic producers between S1 and S2 to enter the market.

multiple correct answers Columbia is producing coffee and textiles. Coffee is produced from labor and land while textiles are produced from labor and capital. Both sectors require labor. Labor can easily move between coffee and textile production. Land is specific to the production coffee while capital is specific to the production of textiles. The country is now considering to open its borders to international trade. You have been hired as an economic consultant to evaluate the potential effect of this policy on the country as a whole and on the welfare of the workers, capital owners and land owners. After studying the international prices of coffee and textile, you have found that the opening up to trade will increase the domestic price of coffee in Columbia, but won't have any effect on the price of textiles. You have been given a range of scenarios for which you need to decide whether they are true or not. All workers will experience an increase in their nominal wage, an increase in their real wage regarding textiles and a decrease in their real wage regarding coffee. Land owners will gain while capital owners will lose from the opening up of trade Columbia will export coffee for textiles and this will enable it to obtain economy-wide gains in the form of obtaining consumption possibilities beyond its own production capacities (PPF). Columbia will export textiles for coffee and this will enable it to obtain economy-wide gains in the form of obtaining consumption possibilities beyond its own production capacities (PPF). Land and capital owners will both gain from the opening up of trade.

All workers will experience an increase in their nominal wage, an increase in their real wage regarding textiles and a decrease in their real wage regarding coffee. Land owners will gain while capital owners will lose from the opening up of trade Columbia will export coffee for textiles and this will enable it to obtain economy-wide gains in the form of obtaining consumption possibilities beyond its own production capacities (PPF). Note: This question is again a direct application of the price effect predictions of the specific-factor model we discussed in class. Because the price of coffee is increasing, the factor-specific to coffee will gain and the other factor will lose. Because trade has increased the price of coffee, one can infer that the economy has a comparative advantage in coffee, exports coffee for textiles and obtains consumption points beyond its PPF. Because a worker's nominal wages go up, and the price of textiles is the same, the real wage in terms of textiles increase. But since the wage increase is smaller than the increase in the price of coffee, the real wage decreases regarding coffee.

Consider an economy producing silk and cloth from labor with the marginal productivities given by MPLsilk=2 and MPLcloth=4. Calculate the opportunity cost of cloth.

Answer: 0.5 Note: The opportunity cost of cloth is the same as the relative autarky price of cloth and is given by MPLsilk/MPLcloth=2/4=0.5

Suppose there are 10 million workers in Canada and suppose that each worker can produce either 2 cars or 30 bushels of wheat. If Canadians choose to consume 10 million cars, how many millions bushels of wheat can Canadians consume under self-sufficiency or autarky?

Answer: 150 Note: Given that a worker can produce 2 cars, producing 10 million cars requires 5 million Canadian workers. Given that there are 10 million Canadian workers, this leaves 5 million workers producing wheat. These 5 million workers can produce 5 million times 30 bushels of wheat. So the the answer is 150 (million bushels of wheat).

Consider an economy producing silk and cloth from labor with the marginal productivities given by MPLsilk=2 and MPLcloth=4. Calculate the opportunity cost of silk

Answer: 2 Note: The opportunity cost of silk is the same as the relative autarky price of silk and is given by MPLcloth/MPLsilk=4/2=2.

Consider an economy producing silk and cloth from labor with the marginal productivities given by MPLsilk=2 and MPLcloth=4. Calculate the relative autarky price of silk.

Answer: 2 The opportunity cost of silk is the same as the relative autarky price of silk and is given by MPLcloth/MPLsilk=4/2=2.

Consider an economy producing silk and cloth from labor. In an hour a worker can either produce 3 units of silk or 5 units of cloth. The (nominal) price of silk is $2. What is the hourly $ wage of a worker in a competitive market equilibrium?

Answer: 6 Note: This question requires you to apply the fundamental wage equation, w=MPL x p, that we discussed in class. Because MPLsilk= 3 and psilk=2 => w = MPLsilk x psilk =6. Because the price of cloth is not given the MPLcloth can't be used to determine the wage.

Consider two economies, Home and Foreign, producing goods A and B only. In Home, the relative autarky price of good A (in units of good B) is 2. In Foreign, the relative autarky price of good A (in units of good B) is 6. Consider now the incentives for and effects of trade. Arbitrage activities will result into a trade equilibrium where both economies face a common terms of trade Arbitrage activities will drive up the relative price of good A in Home Arbitrage activities will drive up the relative price of good A in Foreign. The terms of trade, or relative price of good A (in units of good B) will lie between 2 and 6

Arbitrage activities will result into a trade equilibrium where both economies face a common terms of trade Arbitrage activities will drive up the relative price of good A in Home The terms of trade, or relative price of good A (in units of good B) will lie between 2 and 6 Note: Arbitrage will drive down the price in Foreign (the high cost-location) and drive up the price in Home (the low-cost location). Arbitrage activities will cause the new price, which is called the terms of trade (TOT), to fall between 2 and 6. Hence, 2<TOT<6 and in the trade equilibrium both economies face this common terms of trade.

worker allocations in equilibrium

Because a farm worker's time can be allocated to either cotton or rice production, 'the economy' needs to decide how to allocate the village workers between cotton and rice production. Because a good can always be purchased on the market, the village production decisions will only depend on the wage/income that is received from selling the good on the market. *An equilibrium is defined as a set of market prices, for which no farm has an incentive to reallocate its labor time to either cotton or rice production.* Graphically, an equilibrium can be viewed as a stationary point A on its PPF (where A is exactly located on the PPF, will depend on village preferences). when equilibrium is balances wages of 2 goods are the same, when one is large than the other the market is out of equilibrium and reallocation fo labor brings it back to equilibrium Incompetitivemarketsworkers'wagesaredetermined on how "the market" values their productivities.

A question with MULTIPLE possible answers. In 2018 the Japanese government revised its immigration law to allow more foreign low-educated workers to work in Japan. In this question, you are asked to apply the specific factors model to examine the welfare implications of this policy change on the economic well-being of low-educated workers, high-educated workers and capital owners in Japan. Although the logic of the model extends to a real world of many sectors, we assume the economy consists just of two sectors: information technology and apparel. The three factors of production are: low-educated workers, high-educated workers and capital. Assume that low-educated workers are employed in information technology and apparel and are perfectly mobile between the two sectors. High-educated workers are specific to the production of information technology and capital is specific to the production of apparel. We assume that migration does not change the prices of information technology and apparel. The following statements pertain to the effects of migration on factor allocations and production. Where the migrant workers end up working depends on how migration is modeled. Because of factor-specificity, capital will not move. Migration will cause an increase in the output of both information technology and apparel. Because of factor-specificity, the high-educated workers will not move. Migrants will be employed in both sectors of the economy.

Because of factor-specificity, capital will not move. Migration will cause an increase in the output of both information technology and apparel. Because of factor-specificity, the high-educated workers will not move. Migrants will be employed in both sectors of the economy.

A question with MULTIPLE possible answers. The following statements pertain to the adoption of container technology. Because there is no data on traded container tonnage via trucks or rail, one needs to rely on changes of container usage data via sea ports for island economies like the UK and Japan to examine changes in container utilization. Landlocked countries like Austria and Switzerland did not benefit from the container revolution. Landlocked countries like Austria and Switzerland were able to enter the container age by investing in railway container ports. Research has shown that the UK entered the container age in 1966 and container utilization grew from 20% in 1967 to 80% in 1973.

Because there is no data on traded container tonnage via trucks or rail, one needs to rely on changes of container usage data via sea ports for island economies like the UK and Japan to examine changes in container utilization. Landlocked countries like Austria and Switzerland were able to enter the container age by investing in railway container ports. Research has shown that the UK entered the container age in 1966 and container utilization grew from 20% in 1967 to 80% in 1973.

changes in the real earnings of capital (after shift of increase in M)

Because workers move into the manufacturing sector, MPKM rises and since PM has also increased, the nominal earnings of capital, RK, will increase. Real earnings (or purchasing power) of capital is measured in terms of the price of manufacturing, PM , and the price of agriculture PA . - but since real price of capital has increases and price of agg remained the same, *Capital owners are clearly better off in nominal and real terms and land earnings go down*

A question with MULTIPLE possible answers. The following statements pertain to why the container revolution can be justifiably called a revolution. Before the container age, the trucking, railway and sea shipping industries all operated separately. Containerization resulted in the introduction of intermodal freight transport, which means that a container uses multiple modes of transport-ship, rail or truck-, eliminating sometimes as many as a dozen separate handlings of the cargo relative to the pre-container age. The biggest cost savings from containerization occurred through the dramatic reductions of port-to-port freight costs. Because containerization brought about major investments in new port facilities, it caused a major transformation of the traditional trading ports in New York, San Francisco, London and Liverpool. The container revolution triggered an entrance of new large container ports which took business from traditional ports, like the Port of London and the Port of New York, which eventually ceased to exist.

Before the container age, the trucking, railway and sea shipping industries all operated separately. Containerization resulted in the introduction of intermodal freight transport, which means that a container uses multiple modes of transport-ship, rail or truck-, eliminating sometimes as many as a dozen separate handlings of the cargo relative to the pre-container age. The container revolution triggered an entrance of new large container ports which took business from traditional ports, like the Port of London and the Port of New York, which eventually ceased to exist.

Consumer surplus - calculation, graph info and examples problem: You work at the local store that sells refurbished iPads. The store is running a sale on the refurbished iPad mini 3. Each of your roommates wants to buy an iPad mini 3. Their willingness to pay is given in the table below. Alexis $250 Cameron $175 Fatima $300 Jamir $125 Q1 : If the sale price is $200, who will buy an iPad, and what is the quantity demanded? Q2: If the price is $190, who will buy one and what are their consuerl surpluses?

Consumer surplus, CS = WTP (willingness to pay) - P A1 : Alexis & Fatima will buy an iPad mini. Cameron & Jamir will not. Quantity demanded is 2 when p=$200 A2: at p = $190, Alexia would get one and her CS is $60, and Fatima would get one and her CS is $110. On a demand curve for customer surplus: at any quantity, the height of the demand curve is the WTP of the marginal buyer, the buyer who would leave the market if P were any higher. if the price rises, then CS falls and some buyers leave the market --> deadweight loss (small triangle cut out on graph) the CS is the area below the demand curve ont he graph

A question with MULTIPLE possible answers. The following statements pertain to the effects of containerization. Containerization resulted in an increase of labor productivity causing a hiring of more dock workers. Containerization resulted in fewer, but much larger ports. Containerization resulted in a reduction of the total resource costs of shipping a good from a manufacturer to the customer. Containerization removed the bottleneck in freight transport which occurred at the interface between the land and sea transport modes. This bottleneck became already apparent with the spread of the railways during the first era of globalization.

Containerization resulted in fewer, but much larger ports. Containerization resulted in a reduction of the total resource costs of shipping a good from a manufacturer to the customer. Containerization removed the bottleneck in freight transport which occurred at the interface between the land and sea transport modes. This bottleneck became already apparent with the spread of the railways during the first era of globalization.

A question with MULTIPLE possible answers. The following statements pertain to the beginning of the container age. Containerization was the brainchild of Malcom McLean, an owner of a sea shipping company from North Carolina. Containerization was the brainchild of Malcom McLean, an owner of a trucking company from North Carolina. Containerization required complementary changes in cranes, ships, ports, trucks, trains and storage facilities. At the beginning, many transportation experts viewed container shipping as a niche technology uncertain prospects.

Containerization was the brainchild of Malcom McLean, an owner of a trucking company from North Carolina. Containerization required complementary changes in cranes, ships, ports, trucks, trains and storage facilities. At the beginning, many transportation experts viewed container shipping as a niche technology uncertain prospects.

Brief recap of section 2

Differences in opportunity costs determine the direction of trade, i.e. what an economy is selling (exporting) to or buying (importing) from another economy and the direction of specialization. The theory of comparative advantage can explain trade between villages, towns, cities, regions or nations. A worker's wage is determined by the market value of her marginal productivity. Gains from trade stem from an increase in consumption opportunities beyond an economy's production possibilities frontier (PPF). The magnitude of the economy-wide gains from trade depend on the terms of trade. The one factor assumption assumes away any domestic conflict about the distribution of the gains from trade within the economy. --> Next lesson will revise this and create a more realistic model Opportunity costs reflect market prices

General overview of economics as a scientific way of thinking

Economists explain social behavior and interactions → but as a science, economics also has a methodology Economics is the study of the social problems of choice from a scientific perspective Use theories or models to learn more. In economics, we develop a theory of international trade by imagining a world with just 2 countries producing and trading 2 goods; first in economic isolation, and then under open trade Economics postulates that social outcomes and regulations are grounded in individual motivations and behavior --> people are assumed to be rational *Equilibrium analysis is an analytical framework for analyzing socialoutcomes and events. It requires imagination.*

A question with MULTIPLE possible answers. Consider the effect of foreign direct investment (FDI) on domestic workers, domestic capital owners, domestic landowners and industry output in the context of the specific-factor model we discussed in class. Assume that FDI does not affect goods prices. Because FDI flows into manufacturing, it will increase the well-being of workers employed in manufacturing, but it will decrease the well-being of workers employed in agriculture. FDI will increase the economic well-being of workers in both sectors. FDI will increase the output of manufacturing and decrease the output of agriculture. FDI will decrease the economic well-being of domestic land owners and domestic capital owners. FDI will increase the economic well-being of domestic land owners and domestic capital owners.

FDI will increase the economic well-being of workers in both sectors. FDI will increase the output of manufacturing and decrease the output of agriculture. FDI will decrease the economic well-being of domestic land owners and domestic capital owners.

A question with MULTIPLE possible answers. The following statements characterize real and financial capital: Real and financial capital are both inputs in the production process. Financial capital comes in the form of either equity or debt. Real capital serves as a production factor, like labor and land. Financial capital finances real capital.

Financial capital comes in the form of either equity or debt. Real capital serves as a production factor, like labor and land. Financial capital finances real capital. Note: Financial capital finances real capital, with the latter but not the former being an input in the production process, like labor and land.

Consider two economies, Home and Foreign, producing goods A and good B only. In Home, the relative autarky price of good A (in units of good B) is 3. In Foreign, the relative autarky price of good A (in units of good B) is 5: Foreign has a comparative advantage in good B Home has a comparative advantage in good B In Home, the relative autarky price of good B is 1/3 No economy has a comparative advantage in good B

Foreign has a comparative advantage in good B In Home, the relative autarky price of good B is 1/3 Note: In Home, the relative autarky price of good B is 1/3, which is the inverse of 3. Home has a comparative advantage in good A because of its lower relative autarky price, as 3<5. Foreign has a comparative advantage in good B because of its lower autarky price, as 1/5<1/3. It is not possible that no economy has a comparative advantage.

international trade & ways to measure trade

GDP (gross domestic product) is the sum of the market value of all goods and services produced in the economy in a given time --> trade/GDP is a measure of economic openness Trade: the value of an economy's international trade trade/GDP is a measure of economic openness - Countries with higher trade/GDP have smaller domestic market so they export more - Countries with lower trade/GDP have large domestic markets so they export less - USA has large domestic market so they are less dependent on international trade → small economies are more imbedded in the world economy *Large economies can operate in isolation, small economies can't afford that*

Consider an economy producing silk and cloth from labor with the marginal productivities given by MPLsilk and MPLcloth. The market prices of silk and cloth are given by psilk and pcloth. If psilk MPLsilk < pclothMPLcloth, the economy is not in equilibrium because labor will be reallocated to cloth production If psilk MPLsilk > pclothMPLcloth, the economy is not in equilibrium because labor will be reallocated to cloth production If psilk MPLsilk > pclothMPLcloth, the economy is not in equilibrium because labor will be reallocated to silk production If psilk MPLsilk = pclothMPLcloth, the economy is in equilibrium because there is no incentive for reallocation

If psilk MPLsilk < pclothMPLcloth, the economy is not in equilibrium because labor will be reallocated to cloth production (x) (Yes, because labor earns more in cloth production, it will move to cloth production) If psilk MPLsilk > pclothMPLcloth, the economy is not in equilibrium because labor will be reallocated to cloth production. (No, because labor earns more in silk production, it will move to silk not cloth) If psilk MPLsilk > pclothMPLcloth, the economy is not in equilibrium because labor will be reallocated to silk production (x) (Yes, because labor earns more in silk production, it will move to silk production) If psilk MPLsilk = pclothMPLcloth, the economy is in equilibrium because there is no incentive for reallocation (x). (Yes, because labor earns the same in both sectors, there is no incentive to move, which is our definition of equilibrium).

The following statements pertain to the theory of comparative advantage with more than 2 goods. If there are more than 2 goods, the theory of comparative advantage predicts that a country will have a tendency to export the goods that have a relatively low autarky price and import the goods that have a relatively high autarky price If there are more than 2 goods, the theory of comparative advantage predicts that a country will have a tendency to export the goods that have a relatively high autarky price and import the goods that have a relatively low autarky price The slope prediction of comparative advantage we discussed in class holds also for more than 2 goods If there are more than 2 goods, there is no slope prediction of comparative advantage

If there are more than 2 goods, the theory of comparative advantage predicts that a country will have a tendency to export the goods that have a relatively low autarky price and import the goods that have a relatively high autarky price If there are more than 2 goods, there is no slope prediction of comparative advantage Note: The theoretical challenge is that the slope formulation of comparative advantage we discussed in class is restricted to 2 goods, depicted in a 2-dimensional graphical space . So the logic of the 2-dimensional slope formulation can't be directly generalized for more than 2 goods. However, for more than 2 goods the prediction is preserved in an "average" or "tendency" sense: an economy will have a "tendency" to export goods with a relatively low opportunity cost (or autarky price) and import goods with a relatively high opportunity cost (or autarky price). The mathematical formulation of this n-dimensional prediction is the inequality we discussed in class.

A question with MULTIPLE possible answers. The following statements pertain to the diffusion of container technology. In 1961, the Federal Maritime Board established the standard nominal dimensions of containers and only containerships adhering to these standards received subsidies from the US government. In 1961, the Federal Maritime Board established the standard nominal dimensions of containers and only containerships adhering to these standards were permitted to dock at US ports. The standardization of container technologies by the International Standard Organization (ISO) reduced the fixed costs of using this technology and provided an incentive to foreign governments and shipping lines to invest in this technology. The US container shipment of military cargo to Korea stimulated the diffusion of container technology in East Asia. The US container shipment of military cargo to Vietnam stimulated the diffusion of container technology in East Asia.

In 1961, the Federal Maritime Board established the standard nominal dimensions of containers and only containerships adhering to these standards received subsidies from the US government. The standardization of container technologies by the International Standard Organization (ISO) reduced the fixed costs of using this technology and provided an incentive to foreign governments and shipping lines to invest in this technology. The US container shipment of military cargo to Vietnam stimulated the diffusion of container technology in East Asia.

A question with MULTIPLE possible answers. How did the Suez Canal reduce trade costs? It accelerated the advancement of sail ship technology It accelerated the advancement of steam ship technology It enhanced competition between sail and steam transport It reduced freight rates and travel time

It accelerated the advancement of steam ship technology It enhanced competition between sail and steam transport It reduced freight rates and travel time Note: Because sail ships could not go through the Canal, it accelerated the use of steam ships and increased the competition between sail and steam. But it did not affect sail ship technology.

The following statements pertain to the testing of the theory of comparative advantage. Japan's trade during 1853-1859 followed the theory of comparative advantage in all years Japan's trade during 1868-1875 followed the theory of comparative advantage in all years Japan's trade during 1868-1875 followed the theory of comparative advantage in some, but not all trading years. Japan's trade during 1868-1875 followed the theory of comparative advantage for exports, but not for imports.

Japan's trade during 1868-1875 followed the theory of comparative advantage in all years Note: The prediction holds for all trading years during 1868-1875; in 1853 Japan was still under autarky. Because the theory is a market system prediction, the whole market system either follows the law of comparative advantage or not. So it does not make sense to say that it holds for exports but not for imports.

Effects of Foreign Direct Investment (FDI)

Manufacturing uses labor and sector-specific capital; Agriculture uses labor and sector-specific land. *As capital moves into the economy, it can only be employed in Manufacturing* The increase in the capital stock will raise the marginal product of labor in manufacturing from MPLM to MPLM'. (MPLM '> MPLM) *FDI will shift out the curve from PMMPLM to PMMPLM' and shift M curve up* We assume that FDI does not affect goods prices PM and PA. *Since the inflow of foreign capital will increase the marginal productivity of workers in the manufacturing sector, workers in Manufacturing will earn a higher wage.* *Although capital can only be used in the Manufacturing sector, it will also increase wages in Agriculture because equilibrium will amen wages equal between sectors* *migration benefits both land and capital works. FDI hurts both land and capital owners*

A question with MULTIPLE possible answers. The following statements pertain to the modeling of migration in the specific factor box diagram we discussed in class. Migration increases the size of the box by the number of migrants coming into the economy. The effects of migration on wages will not depend on whether the box is extended to the left or the right by the number of migrants. The effects of migration on wages will depend on whether the box is extended to the left or the right by the number of migrants. Migration changes the shapes of the PM MPLM and the PA MPLA curves. Migration does not change the shapes of the PM MPLM and the PA MPLA curves, only their positions in the extended box.

Migration increases the size of the box by the number of migrants coming into the economy. The effects of migration on wages will not depend on whether the box is extended to the left or the right by the number of migrants. Migration does not change the shapes of the PM MPLM and the PA MPLA curves, only their positions in the extended box.

Migration (intro and overview)

Migration is the movement of people across national borders. We consider migration the context of the specific- factors model where labor is mobile and capital and land are fixed and industry-specific migration increase the amount of labor -- it does not change prices but it expands the box and the curves move to react to the expansion of workers (it does NOT mater which side of the box diagram you add migration to or expand) The wage will go down and migrates go in both sector → hire more workers = move down along the curve because productivity decreases island downward pressure on both sectors *Because prices has not changed there is a reduction in real wages → migration without price change always leaders tio a reduction in real and nominal wage*

A question with MULTIPLE possible answers. In 2018 the Japanese government revised its immigration law to allow more foreign low-educated workers to work in Japan. In this question, you are asked to apply the specific factors model to examine the welfare implications of this policy change on the economic well-being of low-educated workers, high-educated workers and capital owners in Japan. Although the logic of the model extends to a real world of many sectors, we assume the economy consists just of two sectors: information technology and apparel. The three factors of production are: low-educated workers, high-educated workers and capital. Assume that low-educated workers are employed in information technology and apparel and are perfectly mobile between the two sectors. High-educated workers are specific to the production of information technology and capital is specific to the production of apparel. We assume that migration does not change the prices of information technology and apparel. The following statements pertain to the effects of migration on the wages of low-educated workers. Migration will increase the nominal and real wage of low-educated workers. Migration will decrease the nominal and real wage of low-educated workers, independent of their consumption spending. Migration will decrease the nominal wage of low-educated workers. Migration will increase the nominal wage of low-educated workers. Migration will decrease the nominal wage of low-educated workers, but the change in the real wage depends on their consumption spending.

Migration will decrease the nominal and real wage of low-educated workers, independent of their consumption spending. Migration will decrease the nominal wage of low-educated workers.

A question with MULTIPLE possible answers. In 2018 the Japanese government revised its immigration law to allow more foreign low-educated workers to work in Japan. In this question, you are asked to apply the specific factors model to examine the welfare implications of this policy change on the economic well-being of low-educated workers, high-educated workers and capital owners in Japan. Although the logic of the model extends to a real world of many sectors, we assume the economy consists just of two sectors: information technology and apparel. The three factors of production are: low-educated workers, high-educated workers and capital. Assume that low-educated workers are employed in information technology and apparel and are perfectly mobile between the two sectors. High-educated workers are specific to the production of information technology and capital is specific to the production of apparel. We assume that migration does not change the prices of information technology and apparel. The following statements pertain to the effects of migration on the earnings of high-educated workers and capital owners in Japan. Migration will increase the nominal earnings of high-educated workers but the effects on their real earnings will depend on their consumption spending. Migration will increase the nominal, but decrease the real earnings of high-educated workers. Migration will increase the nominal earnings of capital owners but the effects on their real earnings will depend on their consumption spending. Migration will increase the nominal and real earnings of capital owners. Migration will increase the nominal and real earnings of high-educated workers.

Migration will increase the nominal and real earnings of capital owners. Migration will increase the nominal and real earnings of high-educated workers.

Assume you took a new job where your employer provides you with housing, clothing, a company car and a monthly wage of $800. Assume that you spend your monthly wage on either going out or eating at home. The price of a home cooked meal is $20, while the price of a restaurant meal is $40. a. Calculate your real wage in terms of restaurant meals. (2P) b. Calculate your real wage in terms of home cooked meals. (2P) c. Draw a graph that depicts the different combinations of the number of restaurant meals and home cooked meals that your monthly wage is able to buy. Calculate the slope of the graph. What does the slope measure? (6P)

Note: the real wage in terms of good x is the number of units of good x you could get if you spent all of your wage on good x. The real wage in terms of restaurant meals is 20 (=800/40) (2P) b. The real wage in terms of home cooked meals is 40 (=800/20) (2P) -Slope = 2 (or -2, full credit for the correct number) (1P) and it means that going to a restaurant comes at the opportunity costs of 2 home cooked meals. (2P) for explanation. see graph on Canvas

Earnings to capital (K) and land owners (T) (introduction)

Our specific factor box diagram permits us also to depict the earnings of capital and landowners at the initial equilibrium and the change in earnings following a price change. *Capital and land owners hire workers and obtain the revenue created by the output of the hired workers.* *But since capitaland landowners need to pay their workers, their earnings (or profits) are these revenues minus the wage payments to their workers.* In what follows, we show that the areas under the PM MPLM and the PAMPLA provide us information about the revenues and earnings of capital and land owners. Note that the wage rate W reflects the productivity of the last worker hired by capital or land owners.

Producer surplus - calculation, graph info and examples problem: Q1: You are the lucky owner of 3 properties with identical lawns that need mowing. There are 3 lawn-mowing business in town that you can hire. The table below shows their willingness to sell their services: Jin $10 Jada $20 Chris $35 how many woudl you employ for $0-9, $10-19, 20-34, and $35+?

PS = P - cost --> basically profit, producer surplus = price to sell - costs A1: $0 - 9: 0 $ 10 - 19: 1 $20 - 34:2 $35 & up:3 At each Q, the height of the S curve is the cost of the marginal seller, the seller who would leave the market if the price were any lower. the producer surplus is the are above the supply lien in the gap as the in price increase PS and leads to new, less effect producers entering he market. A fall in price reduces PS and some producers leave the market --> deadweight loss (small triangle cut out on graph)

Understanding Capital (into and overview)

Real capital is a factor of production that is used to produce goods & services: Tools, machinery and computers are examples of real capital that are inputs into the production process. Real capital is financed by equity or debt, which are examples of financial capital, which we will study in international finance. Human capital is created through investment While physical capital accumulation was the driver of 19th century productivity, human capital accumulation has become the driver since the mid 20th century.

Earnings of capital and land → Summary

Real earnings of capital and land owners move in opposite directions. An increase in the relative price of an industry's output will increase the real rental earned by the factor specific to that industry, but will decrease the real rental of the factor specific to the other industry. Because trade increases the relative price in an economy's comparative advantage sector and decreases the relative price in the comparative disadvantage sector, the model predicts that the specific factor in the comparative advantage sector will gain and the specific factor in the comparative disadvantage sector will lose from trade liberalization. international trade changes the market by changing prices and the price changes the labor, land, and capital distribution when countries open up to International trade, prices go up

Wage introduction and marginal productivity of labor

Recall that we assumed that the Sato family can either produce 1 unit of rice or 1 unit of cloth in 1 hour, which are the marginal productivities of labor (MPL). Note that the marginal labor productivity pertains to output per 1 hour of farm work. wage fo a good = price of good x MPL of good

How did the Suez canal affect trade costs?

Suez dramatically changed the far east trading routes (that were first established back in the 1500s) sailing ships could not go through the canal and steamboats created more consistent shipping times and allowed for travel through canal Accelerated technological change from sail to steam

So why do governments impose tariffs?

Tariffs are 'relatively easy' to collect. Tax revenues are needed to finance public goods in the absence of other sources of government revenue. Because the government collects the import tax from foreign exporters, it appears that foreigners have to pay the burden. So populists tend to like tariffs Because CS losses are spread among millions of consumers, it is too costly for them to organize. A single US household might only lose $50 a year from a US tariff and is also not aware that it pays the burden of the tariff. Since PS losses are concentrated among fewer producers, import- competing domestic producers (and their employees) have an incentive to lobby policy makers for tariffs.

The Labor Market Equilibrium

The Labor Market Equilibrium Is Characterized By Two conditions: 1) *equality of wages: w= PM · MPLM=PA · MPLA* (because each sector pays the same wage, workers have no incentive to move, which means we are in an equilibrium) In equilibrium, it is characterized by no motivation to reallocate AND the amount of labor allocated has to be even relative to production? 2) *Labor employed in manufacturing plus labor employed in agriculture = Total labor supply.*

Markets (overview)

The Red liens follow the flow of goods and service, labor, capital, and land. The Green lines follow the money spent on goods-services and the income given to workers, land, and capital owners Households buy and firms sell goods and services on markets for goods and services *there are 3 factors of production* : labor, land, and capital - Household income comes from selling their factors of production via wages (labor), rent (land) and profit (capital) to firms Households sell and firms buy factor services on markets for factors of production

Calculating opportunity costs and Production Possibilities Frontier (PPF)

The Sato family can either produce 1 unit of rice or 1 unit of cloth in 1 hour. (8 hours they can produce 8 until of rice or 8 units of cotton) The Ito family can either produce 2 units of rice or 4 units of cotton in 1 hour. (8 hours they can produce 16 until of rice or 32 until of cotton) to make the PPF, graph these production pints (the 8 hour ones) with rice and cotton being the x and y axis and then draw the slope of the line and that is the PFF (it connects all these points) *The ppf (slope) is the opportunity costs of the good on the horizontal axis* (for the Sato family it is -1 because they have to give up 1 unit of cotton to get 1 extra unit of rice. The opportunity costs for rice is 1, the opportunity costs for cotton is 1 for the Ito family the PPF slope is -2, so opportunity costs for rice is 2 and the opportunity costs for cotton is 1/2 The PPF depicts all the production possibilities and the opportunity costs of goods on the axis - When describing the opportunity costs you have to use units of goods - In this analysis we only assume labor as the only factor of production - Without trade, the consumption possibility is the same as the PPF - Don't need to make any assumptions about their preferences

Nominal wages and real wage

The currency value of what a worker takes home is also called the *nominal wage* (e.g. after graduation, your nominal wage might be $40,000). The *real wage* is the buying or purchasing power of a worker's nominal wage. How much can you buy goods and services (you can't eat dollars) Whether this nominal wage increases or decreases a worker's materialistic well-being will depend on the % changes in PM (manufacturing price) and PA (agg price). If the nominal wage increases by 5%: - If PM increases by more than 5%, the buying power in terms of the M-good has decreased, i.e. w/PM has fallen. - If PM increases by less than 5%, the buying power in terms of the M-good has increased, i.e. w/PM has risen. - If PM increases by exactly 5%, the buying power in terms of the M-good has stayed the same , i.e. w/PM has not changed.

multiple correct answers Mallorca -a tourist island in the Mediterranean- is producing tourist services and food. Tourist services are produced from labor and coastal land while food is produced from labor and agricultural land. Both sectors require labor. Labor can easily move between the tourist sector and the food sector. Coastal land is specific to the production of tourist services while agricultural land is specific to the production of food. Because of Covid, Mallorca was operating under a very restricted amount of tourism. Consider now the effects of the Mallorca government reducing its restrictions on tourism. Assume that the opening up has increased the price charged for tourist services while the price of food has stayed the same. Everybody in Mallorca is consuming both tourist services and food. The following statements pertain to the effects of the opening up on the reallocation of labor and the welfare effects on workers, coastal land owners and agricultural land owners in Mallorca. The effect on the welfare of workers depends on which good they are consuming, and not where they are employed. The welfare of workers employed in the tourist sector will increase while the welfare of the workers employed in the food sector will decrease. The welfare of coastal land owners will decrease and the welfare of agricultural landowners will increase. Workers will move from the tourist sector to the food sector The welfare of coastal landowners will increase and the welfare of agricultural landowners will decrease

The effect on the welfare of workers depends on which good they are consuming, and not where they are employed. The welfare of coastal landowners will increase and the welfare of agricultural landowners will decrease Note: this question is a direct application of the price effect predictions of the specific-factor model we discussed in class. Manufacturing is replaced by tourism and food is replaced by agriculture. Coastal land is replaced by capital and agricultural land is replaced by land. Although the specific factors have different names, the underlying logic is the same. Because the price of tourist services has gone up, workers will move from the food sector to the tourist sector, not the other way around. Again, the welfare effects of the mobile factor (the workers) will depend on what they consume, not where they are employed. The specific factor employed in the sector whose price has risen (costal landowners) will gain while the welfare of the other specific factor (agricultural landowners) has fallen.

The following statements pertain to the specific box diagram we discussed in class. The downward sloping curves in the diagram pertain to The land demands from the agricultural and manufacturing sectors. The overall demands in the economy. The labor demands from the agricultural and the manufacturing sector. The capital demands from the manufacturing and agricultural sectors.

The labor demands from the agricultural and the manufacturing sector.

Effects of migration on wages- Summary

The model implies that migration brings down the wage rate at home from W0 to W1 -independent of the graphical modeling of migration- because migration increases the total labor supply. Because the migrant workers are allocated to both industries, each industry has more workers. But since the amount of capital and land are fixed, the marginal product of labor declines in each industry, reducing (at fixed goods prices) the value of the marginal product of labor in each industry and, therefore, decreases the (nominal) wage from W0 to W1. *Because of unchanged goods prices, the workers' real wage has also declined (regardless of their consumption choices)* The workers who remain in the foreign economy should see arise in their wage rate, reducing the incentives to migrate. Hence, migration is predicted to reduce the wage gap.

Big ideas for the semester

The most fundamental economic idea is that scarcity forces people and societies to choose among competing resource uses --> They face *trade-offs* We will capture these trade-offs graphically with a framework, which is called the *Production possibilities frontier (PPF)* The cost of an economic activity is what you give up to get it i.e. your next best forgone opportunity Effective decision-making requires comparing the additional costs of alternatives with the additional benefits People respond predictably to positive and negative incentives

multiple correct answers The following statements pertain to nominal and real wages. The nominal wage is the currency value of what a worker takes home. The nominal wage changes always more than the real wage. The real wage is the purchasing power of a worker's nominal wage. If prices don't change, an increase in the nominal wage will also be an increase in the real wage.

The nominal wage is the currency value of what a worker takes home. The real wage is the purchasing power of a worker's nominal wage. If prices don't change, an increase in the nominal wage will also be an increase in the real wage.

The following statements pertain to the specific box diagram we discussed in class. The size of the box is determined by The amount of physical capital in the economy The number of workers in the economy The amount of land in the economy The nominal wage

The number of workers in the economy

A question with MULTIPLE possible answers. The State of North Carolina (NC) has given strong tax incentives to German automobile producers like Daimler to build new automobile plants in the state, which is a form of Foreign Direct Investment (FDI). Evaluate this policy in light of the specific-factor model, assuming that North Carolina produces just automobiles and agriculture. Both sectors employ workers, which is the mobile factor. Automobiles also require capital, which is specific to automobile production. Agriculture also requires land, which is specific to the production of agricultural goods. Assume that this FDI does not affect the prices of automobiles and agricultural goods in North Carolina. The policy benefits capital owners in North Carolina. The policy hurts capital owners in North Carolina. The policy hurts land owners in North Carolina. The policy benefits workers who are employed in the automobile sector but hurts those who are employed in the agricultural sector. The policy benefits workers, independent of their employment.

The policy hurts capital owners in North Carolina. The policy hurts land owners in North Carolina. The policy benefits workers, independent of their employment.

terms of trade in equilibrium

The terms of trade lies between the self-sufficiency/autarky prices of the two economies and characterizes a trading equilibrium. How much is actually traded of each good depends on demand preferences relative to the relative supply capacities of the two economies.

The statements pertain to the applicability of the theory of comparative advantage. The theory of comparative advantage can only be applied to trade between farm households, villages and national economies, as discussed in class. The theory of comparative advantage has such broad applicability because of its formulation in terms of opportunity costs Because David Ricardo developed the concept in the context of trade between England and Portugal, the theory applies only to trade between nation states. The theory of comparative advantage can be applied to trade between individuals, families, villages, towns, cities, regions or nation states

The theory of comparative advantage has such broad applicability because of its formulation in terms of opportunity costs The theory of comparative advantage can be applied to trade between individuals, families, villages, towns, cities, regions or nation states Note: It is true that, in class, we developed the theory in the context of trade between farm households, villages and national economies. But since the concept applies to any economies, it could be applied to trade between economies like cities, regions or supra-national economies like the European Union (in its trade with the US). It can also be applied to trade between US states like VA and MD. Because the concept of opportunity cost pertains to any choices, it is invariant to geographical space, cultural setting and historical time.

Small versus large country assumption

The welfare effects of trade policy will depend on whether the economy's trade policy will have an effect on the world price of the good. This will depend on the size of the country's industry relative to the size of the world market *Under the small country assumption, the economy is too small to have any effect on the world (or international) price. Foreign export supply is horizontal and fixed at the world price PW* *Under the larger country assumption, the economy's trade policy can have an effect on the world price.* ONLY DOIGN SMALL COUNTRY ASSUMPTION FOR RIGHT NOW IN SECTION 4

Overall effect on real wages for workers form an equilibrium shift where M increased price

The workers' purchasing power in terms of the agricultural good has increased while the purchasing power in terms of the manufactured good has decreased. The Overall Welfare Effect On Workers Is Ambiguous: - A worker who spends more of her/his income on the agricultural good isbetter off. - However, a worker who spends more of her/his income on the manufactured goods is worse off. - *A worker's welfare does not depend on where she/he works, but depends on her/his consumption spending.* *Key point: a worker's real wage doesn't depend on where the worker is employed because all workers receive the samenominal wage W* *wage increase is always smaller than price increase*

The direction and gains from trade are related as follows: Trade in the direction of comparative disadvantage yields economy-wide losses Trade in the direction of comparative advantage increases an economy's consumption possibilities. Trade in the direction of comparative disadvantage moves an economy outside its production possibilities frontier (PPF). Trade in the direction of comparative advantage yields economy-wide gains.

Trade in the direction of comparative disadvantage yields economy-wide losses Trade in the direction of comparative advantage increases an economy's consumption possibilities. Trade in the direction of comparative advantage yields economy-wide gains. Note: Trade in the direction of comparative advantage means exporting the good with a low opportunity cost and importing the good with a high opportunity cost. Trade in this direction permits consumption outside an economy's PPF, causing economy-wide gains. Trade in the direction of comparative disadvantage would mean exporting the good with a high opportunity cost. We have shown in class for a farm economy household that such trade would move the economy inside its PPF, causing household or economy-wide losses.

Economic globalization (history and what drives it)

Two ears of economic globalization - First era of globalization: 1850-1914 - Second era of globalization: 1945 Drivers of genomic globalization: - reduction of government imposed barriers to international trade --> Governments have the power and authority to slow or stop economic globalization - innovations in transport and information technologies --> int he 1st way the invention of the railway and steam boat and opening of Suez Canal in late 1869 accelerated the transition from sail to steam, 2nd wave of globalization saw air deregulation and innovation in air travel and the container revolution

Terms of trade and the distribution of the gains from trade

What changes an economy is terms of trade, changes in price condition changes terms of change with thus changed rich/poor balance between countries Countries that export oil benefited from higher oil pisces while important oil countries suffer from a higher oil price The terms of trade is defined as the price of an economy's exports divided by the price of its imports --> Pexports/Pimports An increase in Pexports or a fall in Pimports will result in an improvement ofan economy's terms of trade An increase in the terms of trade is welfare improving since the economy will either earn more from its exports or the economy will pay less for its imports.

effects of migration ons specific factors (land and capital)

With more labor, the marginal product of capital MPKM will rise and therefore the rental, RK , on capital (assuming unchanged goods prices). Since PM and PA did not change, the real rental, RK/PM, in terms of manufacturing will increase and the real rental, RK/PA , in terms of agriculture will also increase. With more labor, the marginal productivity of land MPTA will rise andtherefore the rental, RT, on land (as goods prices don't change). Since PM and PA did not change, the real rental, RT/PM, in terms of manufacturing will increase and the real rental, RT/PA , in terms of agriculture will also increase. graphically, migration increase revenue space and lowers wage, w which increase earnings Since highly educated workers are often more sector-specific than low-skilled workers, high skilled domestic workers often benefit from the influx of low skilled migrants. *Both land and capital owners are better off by migration*

multiple correct answers Assume your salary has increased by 5% and you only consume food, apparel and housing (i.e. the rent you pay for your apartment). Assume the price of food has increased by 3%, the price of apparel has increased by 7% and your rent has increased by 5%. (4P) Your purchasing power (or real wage) has increased in terms of apparel and has declined in terms of food Your purchasing power (or real wage) has increased overall Your purchasing power (or real wage) has stayed the same regarding your rent. Your purchasing power (or real wage) has decreased overall Your purchasing power (or real wage) has increased in terms of food and has declined in terms of apparel.

Your purchasing power (or real wage) has stayed the same regarding your rent. Your purchasing power (or real wage) has increased in terms of food and has declined in terms of apparel. (x)

True/False: Decide whether the following statements are true or false. If a statement is true, just state that it is true. If a statement is false, state that it is false and restate it so that it becomes an economically meaningful true statement. (6P, 2P each) [Hint: You need to remain in the context of the original statement. So don't change it into a different true statement such as, "Joe Biden is the current US President"]. a. A rise in a country's terms of trade is welfare declining for the economy because it will either earn more from its exports or pay more for its imports. b. A drop in the world price of copper, ceteris paribus, will benefit countries that import copper and those that export copper. c. In 2012, about 80% of US workers were employed in the service sector, about 8% were employed in agriculture and only 1.5% were employed in manufacturing.

a. A rise in a country's terms of trade is welfare declining for the economy because it will either earn more from its exports or pay more for its imports. *FALSE...welfare improving.....or pay less for its imports.* b. A drop in the world price of copper, ceteris paribus, will benefit countries that import copper and those that export copper. *FALSE...and hurt countries that export copper* c. In 2012, about 80% of US workers were employed in the service sector, about 8% were employed in agriculture and only 1.5% were employed in manufacturing. *FALSE: ... about 80% of US workers were employed in the service sector, about 8% were employed in manufacturing and only 1.5% were employed in agriculture.*

*can either use graph provided or make your own* Consider the specific factors model we discussed in class. In class, we assumed that international trade leads to an increase in PMwhile PA remains the same. Starting from an equilibrium point, assume now that international trade leads to a decrease in PA, while PM remains the same. (11P) a. Use a graph to illustrate which curve is going to shift in which direction. Depict in your graph how the agricultural good will affect the nominal wage and the allocation of labor between manufacturing and agriculture. (5P) b. Explain how the price decrease will affect the real wages of workers. (2P) c. How will the price decrease will affect the earnings of land owners ? (1P) d. How will the price decrease will affect the earnings of capital owners ? (1P) e. Assume that the change in the price of agriculture is the result of a government policy towards free trade. Which groups in the economy are expected to be in favor and which groups are expected to be against this policy? (2P)

a. The drop in the agricultural price means that the curve __PAMPLA__will shift down and the new equilibrium will move from point A to a new point B (which you need to label). This means that the nominal wage will fall from w0 to w1 (which you need to label). Workers will move from _agriculture_________to manufacturing_____and the new labor allocation is now denoted by L1. (which you need to label). (3P) (1P) for shifting PAMPLA down (1P) point for the labelling of B, w1 and L1 b. The real wage in terms of A, w/PA, will increase/ because the nominal wage w falls by less_than PA. The real wage in terms of M, w/PM, will decrease because the price of manufacturing__ remains the same. The workers' real wage will decrease in terms of manufacturing and will increase in terms of agriculture. (2P) c. Because workers move out of the agricultural sector, the earnings of landowners will fall. (1P) d. Because workers move into the manufacturing sector, the earnings of capital owners will rise. (1P) e. Capital owners will be in favour of this policy, landowners will be against this policy. Workers will be ambiguous or it will depend on what they consume. (2P)

determining capital and land owners revenues

capital earnings is the total revenue minus total labor costs --> oh a graph the total area under the curve is the total revenue, the area under the curve but above the wage point is the earnings, the area under the wage to the labor point (rectangle on theirside of graph) is the labor costs When it shifts: - if manufacturing curve shifts up form price increase, costs also increase - but since price always increases more than wage (i.e. the goods price increase exceeds the wage increase), the increase in revenue is greater the increase in labor costs. - Capital earnings rise .

International trade effects on CS and PS

international trade reduces the domestic price (it falls) --> As price goes down PS goes down and CS goes up If price goes down there is a loss in producer surplus decreases by B If price goes down then consumer surplus gain by B and D → it includes the producer the lost plus more Consumer surplus gain is la producer surplus falls by area B and is now just C Net effect: the net effect on the welfare as a who is B +D - B --> total gain and increase in welfare by D

3 factors of production (and assumptions of section 3 models)

labor (L), capital (K) and land (T). *Labor/workers (L)* can be employed in both M and A and are mobile. *Capital (K)* is specific to M; it can't be used in A; the owners of capital hire workers to operate the machines. *Land (T)* is specific to A; it can't be used in M; the land owners hire workers to work on the land. *M=manufacturing, A = agriculture *Critical assumption: there are declining marginal productivities of labor (MPL) in manufacturing and in agriculture because as you add more workers, productivity decreases* This model is called the specific factor model we assume price remains constant as you move along the slope, by trade changes prices and when that happens curves shift up or down trade causes an increase ein price

The following statements pertain to the specific factors model we discussed in class. In equilibrium both sectors have to pay the same wage because of the diminishing marginal productivities of labor. the specificity of land and capital the diminishing marginal productivities of labor and the specificities of land and capital. labor mobility

labor mobility

price shifts and reallocation of labor

lets say trade raises the price of manufacturing, so the labor cure of manufacturing shifts up Initially M will pay a higher wage, this will cause workers to go there and thus wages will go down, as workers leave A MPL increases so wages for A so workers are reallocated back to equilibrium Everyone wages goes up as a result because in new equilibrium they have the same, higher wage because of labor mobility btu it will impact what you consume → the price of the A good hasn't changed but M price has changed, so real wage of A has gone up but the real wage of M has decreased workers receive higher prices regardless of where they work. The equilibrium point B is associated with labor allocation L1 where more workers are employed in the manufacturing sector and fewer in the agricultural sector compared to the initial (autarky) allocation L0.

Autarky (Definition)

operating in isolation/ self sufficiency (no trade)

tariff graphical analysis

tariff raises the world price, as a result Domestic consumption falls from D1 to D2. Domestic production rises from S1 to S2. Imports fall from M1 to M2. The effect of the tariff on Home's welfare is then: The $ value in the change of consumer surplus + The $ value in the change of producer surplus + The $ value of tariff revenue collected by the government Producer surplus increases by area C Consumer surplus falls by C, D, E, F Government gains E D and F are both deadweight losses --> F is consumer deadweight loses because people left the market due to higher prices. D is consumer dead weight but is not picked up by producers becuase it just allows inefficient producers enter the market the overall net welfare = C + E - C - D- E - F = -D -F overall net loss, consumers loose more than producers or government gain

terms of trade (graphically) normal vs. real price

the amount of one good (or currency) a good is traded for on the market) *normal price* is the money price of a commodity given in a currency --> 1 unit of rice for 20 yen and 1 unit of cotton for 10 yen *real price* is the value of one good in units of another good --> 1 unit of rice for 2 units of cotton, and 1 unit of cotton for 1/2 unit of rice adding the terms of trade line to the PPF with the terms of trade as the slop in terms of goods in relative price (rice/cotton or 3/2 for this example) and this lien depicts trading opportunities for families outside of the original PPF (also means more consumption) complete specialization can lead to even more gains outside PPF and thus more consumption nd higher standard of living a TOT line with a steeper slope yields larger gains and a TOT with a flatter slope yield smaller gains

Labor supply curve

the economy's total labor supply L defines the length of a box diagram. Each point ont he horizontal axis pertains to an allocation of labor supply between M and A (how many/ what percentage of workers are in each sector) y axis is the nominal wage (numeric value) labor demand for M and A are drawn and the market is at equilibrium where the curves intersect --> wages are the same - To the left of it, M would pay a higher wage and as workers reallocate the wage will go down, and as A looses workers wages go up until they equalize - To the right of it, A would pay a higher wage, as workers go there the wages in A goes down and as M looses worker wages go up until they equalize - When we change prices only one curve will shift → trade will increase M and wages will go up and curve will shift and workers need to relocate to new equilibrium workers ar emboli and can move between M and A

Arbitrage and the incentives to trade

the incentive for trade in competing goods is arbitrage *Arbitrage is the process of buying a good at a low price in one location and selling it at a higher price in another location* Because arbitrage activities increase the demand for the good in the low-price location and increases the supply of the good in the high price location it will drive up the price in the low-price location and drive down the price in the high price location. So arbitrage results in a convergence of the two prices. Arbitrage equalizes prices and find equilibrium in between each of the individual market prices Some people buy things in one economy and sell it in another to make a profit → eventually a price that emerges is a resulted of arbitrage activities arbitrage will change relative prices in the transition to the trade equilibrium this means *that the economy will have a tendency to export the goods that have a relatively low autarky price and import the goods that have a relatively high autarky price*

Producers in Alpha city and Beta city are producing jeans and robes under competitive market conditions. Initially Alpha city and Beta city are producing both goods under autarky, where the relative autarky price of 1 jeans is 2 robes in Alpha city while the relative autarky price of 1 jeans is 3 robes in Beta City. After the cities open up to trade, both citizens will face a terms of trade described as follows: 1 jeans will trade for x robes (or the price of 1 jeans will be x robes) in a trade equilibrium. x is between 2 and 3 x is less than 2 x is more than 3 x is more than 2

x is between 2 and 3 Note: The terms of trade will lie between the two autarky prices. So the price of 1 jeans will be x robes, where x is between 2 and 3.