Lets fuccn do this
If one country has an absolute advantage in both goods, it must have a higher real wage in free-trade equilibrium. True/false, explain.
TRUE, If a country has an absolute advantage in both goods, then it must have a higher wage. The higher wage is a result of higher productivity and it should not be interpreted therefore as a reason for a high-wage country not to trade. As long as there are competitive advantages in different countries, countries should always trade.
State the "no-trade" model. What is the idea behind this? Why do we care?
The "No-Trade" Model is essentially a world in which there would be no trade or gains from trade and has the following conditions: 1.) Identical production functions among countries 2.) The same relative endowments in all countries 3.) Constant Returns to Scale 4.) Identical and homogeneous tastes in all countries 5.) No distortions The 5 conditions of the "No Trade" Model show us what can cause trade and can be defined as the bases for trade. If any of these 5 conditions differ among the 2 countries, then trade is likely.
Explain or show the following: if a country is running a balance-of-trade deficit, then consumption spending exceeds the value of production.
p1*(D1-X1)+p2*(D2-X2)>0 meaning that imports are not offset by exports as in equilibrium for open economy both values are positive (D exceeds our production of both X1 and X2) rearranging: p1*D1+p2*D2>p1*X1+p2*X2 value of consumption (expenditure)>value of production (income)
What does the gains from trade theorem say about the distribution of the gains within a country?
the gains from trade theorem compares a consumption bundle chosen at free trade with a consumption bundle chosen at autarky. The uneven distribution of trade is important in understanding the politics of trade policy and why some groups will oppose liberalization or lobby in favor of protection from foreign competition despite the fact that free trade maximizes overall national income and welfare
Derive the curvature of the production frontier (two goods) when (1) there is a single factor of production and increasing returns to scale in both industries.
The curvature of the PPF is bowed inward toward the origin. This implies that as one unit of labor is taken from X1 and given to X2, the amount of X2 produced is greater than 1, and vice versa, otherwise known as increasing returns to scale.
can you argue that the gains-from-trade theorem must imply that the gaining group must be able to compensate the losing group such that everyone one is better off with free trade relative to autarky?
fundamental tension over trade policy and give the key intuition as to why groups within a country fight so ferociously over free trade versus protection: While free trade increases aggregate income for a country, nothing guarantees that all individuals within the country benefit much less benefit equally.
In the two-good, one-factor Ricardian model, define comparative advantage and define absolute advantage. If I look at the production possibility frontiers of individual workers for two countries, how would I identify absolute versus comparative advantage in the figure?
+ Absolute advantage refers to the comparison of the 's for a given industry across countries + whereas comparative advantage refers to the relative productivity in the two industries across countries. - If one production possibility frontier curve is completely greater than the other, then that country has an absolute advantage. - However, if one country's slope is less than the other's for producing one good, then that country has a comparative advantage.
Use the Ricardian model to suggest a response to the argument that "high wage countries should not trade with low wage countries because the high wage country will lose jobs"
-only one factor of production exists (Labor). When a country trades on an open market, the total amount imported must equal the amount exported. Thus, net production is unchanged, so jobs lost in one sector (where the good is now imported) are replaced by jobs in the now larger export sector. This trade principle applies regardless of the trading partners, implying that an arrangement between high and low wage economies would not cost the high wage economy jobs
How is the gains-from-trade theorem useful in countering the argument that one country can only gain at the expense of another (a zero sum or negative sum game)?
A country will not trade if it does not gain from trade. In an open economy, the country will export what goods it can sell for higher prices than it can domestically, and it will import what it can buy for a lower price. For a country to gain at the expense of another, one country would have to specialize in the production of a good that is cheaper on the world market, and the gains-from-trade theorem states that countries will do the opposite. Gain from trade theorem suggest that trade is a positive sum game. The ability to trade at any price other than the Autarky prices makes an economy strictly better off.
Reproduce the gains-from-trade theorem without looking at the book
Free-trade consumption is preferred to autarky consumption. At free-trade prices, the autarky consumption bundle could have been purchased for the same or less money but wasn't, so the free-trade bundle must be preferred. The assumptions of competition in all markets and absence of other distortions are sufficient conditions to ensure that free trade is preferred to autarky.
Define and explain gains from exchange versus gains from specialization.
Gains from exchange: allows consumers to exploit their differences in their endowment (funding) and/or preferences Gains from specialization: allows the world to produce more goods by allowing each country to focus on a particular good in which it has a low opportunity cost
In the Ricardian model, how do we know that market economies specialize in the "correct" good: the comparative-advantage good?
Holding the output of one good constant, the reallocation of labor in each country toward the sector of comparative advantage causes the world output of that good to rise. A pattern of comparative advantage is both a necessary and sufficient condition to be able to increase the world output of one good without decreasing the output of the other. -Profit maximizing behavior (MRS=w1/w2 factor price ratio) rules out bad outcome (what he said in class)
Define homogeneous preferences. Why is this a useful assumption for analyzing trade?
Homogeneous preferences characterize groups that want the same thing (goods) - This allows us to analyze trade using units of these goods to measure gains from trade and how they are distributed. - If two countries are after entirely different goods = much more difficult. This assumption is used to neutralize differences in demand between countries as a cause of trade. - Allows us to focus on differences in production as the cause of trade.
Explain why the free-trade price ratio for two countries must lie in between their autarky price ratios.
If a given good's price on the world market is higher than its price within a given country, then this country can gain from exporting this good Alternatively, if the world price for the good is lower than the price within the country, then the country can gain from importing it If the world price ratio is not in between the autarky price ratios, both countries will want to either import/export the same good, contradicting trade balance. They will not trade with each other under these circumstances.
Write a short five-sentence report for the president stating what sort of groups within a country might be made worse off by trade liberalization and what sort of groups seem sure to gain.
Producers of the scarce good will lose due to deteriorate in price that one can sell good for. Consumers of scarce good will be better off due to the fact they can import scarce goods cheaper from a foreign country that has comparative advantage (or abundance) of it. Workers where country downsizes in industry that it does not have comparative advantage in do not benefit. Country as a whole benefits due to higher income of free-trade production at free-trade prices and selling to world what is more valuable to them and buying from world what is more costly for the home country to produce.
Define the economy's social optimal output levels for given goods prices. Prove: given perfect competition and the absence of distortions such as taxes or externalities, profit maximization by individual firms results in the socially optimal output levels for given goods prices.
The economy reached the socially optimal output levels when the marginal rate of transformation of producers, which is the slope of the ppf, equals to the marginal rate of substitution of the consumers, which is the slope of the utility curve. They are equal to the price ratio (p1/p2) of the two goods. = MRT (producers) = MRS (consumers)
address the argument that it is better to export high-tech than low-tech goods
The graph on 5.1 shows the production frontiers and indifference curves for a single country. The point of the graph is only that the world price ratio should differ from the domestic autarky price. Given any difference, the country gains by exporting what is more valuable on world markets than at home and by importing from the rest of the world what is more costly to produce at home than abroad. In this situation, if you are producing high tech goods and low techs goods, you would be able to increase your country's import buying power by leveraging your high tech exports (which are worth more abroad).
Derive the curvature of the production frontier (two goods) when (1) there is a single factor of production and constant returns to scale.
The only factor of production is Labor, and the fact that they exhibit constant returns to scale means that one more unit of labor produces one more unit of good X1 or X2, however a Capital input must be given up. Therefore, the PPF is linear and downward sloping.
In the two-good, one-factor Ricardian model, the ability of two countries to gain from trade does not depend on absolute advantage. True, false, explain.
True. Although country H may have an absolute advantage for both good X1 and X2 compared to country F, H will still profit from trade as long as F has a higher comparative advantage in either X1 or X2. Existence of trading opportunities depends only on comparative advantage.
In the two-good, one-factor Ricardian model, the ability of two countries to gain from trade does not depend on absolute advantage. True, false, explain.
True. Although country H may have an absolute advantage for both good X1 and X2 compared to country F, H will still profit from trade as long as F has a higher comparative advantage in either X1 or X2. Existence of trading opportunities depends only on comparative advantage.
Use the idea in Figure 5.4 to argue that a group that has a high preference for the country's own export good could be made worse off by trade liberalization
While in autarky, the group with a high preference for the good enjoys a lower price for the good. Since the good is being exported and having its price increased to the global price, this group will have to pay more for the good as a result of trade liberalization.