International Economic
Name: Bui Diu Cam Tien
Student ID: BABAIU17027
Wednesday evening class
ASSIGNMENT 1
Chapter 2
6/
a.
Number of bicycles
produced per hour
Number of snowboards
produced per hour
Comparative
advantage
Home
Foreign
country
country
Absolute advantage
Home/Foreign ratio
4
2
2
Home/Foreign ratio
6
8
Bicycles
Snowboards
3/4
b. - Home country is an absolute advantage in the production of bicycles.
- Foreign country is an absolute advantage in the production of snowboards.
c. - The opportunity cost of bicycles in term of snowboards at Home is 1.5
snowboards.
- The opportunity cost of bicycles in term of snowboards at Foreign is 4
snowboards.
d. - Having a lower opportunity cost in producing bicycles than Foreign, Home
has a comparative advantage in producing bicycles. Therefore, Home will
export bicycles.
- Having a lower opportunity cost in the production of snowboards than
Home, Foreign has a comparative advantage in the production of
snowboards. Therefore, Foreign will export snowboards.
7/
In the No-Trade Equilibrium
Foreign Country
Home Country
Wage TV= 12
Wage C= ?
Wage*TV= ?
Wage*C= 6
MPLTV= 2
MPLC= ?
MPL*TV= ?
MPL*C= 1
PTV= ?
PC= 4
P*TV= 3
P*C= ?
a.
- The MPL for TVs at Home is MPLTV = 2
- The MPL for cars at Home is
Wage TV = Wage C = 12
 MPLC =
Wage c
12
Pc
4
=
=3
- The no-trade relative price of TVs at Home is
Ptv
Pc
MPLc
3
= MPL tv= 2
b.
- The MPL for TVs at Foreign is
Wage*C = Wage*TV = 6
 MPL*TV =
Wage∗tv
P∗tv
6
=3=2
- The MPL for cars at Foreign is MPL*C = 1
- The no-trade relative price of TVs at Foreign is
P∗tv
P∗c
MPL∗c
1
= MPL∗tv = 2
c.
- We have:
Ptv
MPLc
Pc
P∗tv
P∗c

3
= MPL tv= 2 = opportunity cost of TVs at Home.
MPL∗c
1
= MPL∗tv = 2 = opportunity cost of TVs at Foreign
Ptv
Pc
3
1
=2 >2 =
P∗tv
P∗c
 Foreign has a comparative advantage in producing TVs, so Foreign will
export TVs.
- We also have:
Pc
Ptv
=
P∗c
=
P∗tv

Pc
Ptv
MPLtv
2
= = opportunity cost of cars at Home.
MPL c 3
MPL∗tv
MPL∗c
=
2
= 2 = opportunity cost of cars at Foreign.
P∗c
< 2 = P∗tv
3
 Home has a comparative advantage in producing cars, so Home will export
cars.
d.
- Real wage at Home under Free trade:
MPLC = 3 units of car
Pc (w)
Ptv (w)
. MPLC = 1 x 3 = 3 units of TV
- Real wage at Home under no-trade:
MPLC = 3 units of car
Pc
Ptv
. MPLC =
2
3
x 3 = 2 units of TV
 Therefore, Home workers are paid in term of cars, because Home has a
comparative advantage in producing cars and export cars. Under free trade,
Home is better off since real wage in term of TVs has increased from 2 units
of TV in no-trade to 3 units of TV in trade.
e.
- Real wage at Foreign under free trade:
MPL*TV = 2 units of TV
Ptv (w)
Pc (w)
. MPL*TV = 1 x 2= 2 units of car
- Real wage at Foreign under no-trade:
MPL*TV = 2 units of TV
P∗tv
P∗c
1
. MPL*TV = 2 x 2 = 1 unit of car
 Therefore, Foreign workers are paid in term of TVs since Foreign has a
comparative advantage in producing TVs and export TVs. Under free trade,
Foreign is better off since real wage in term of car has increased from 1 unit
of car in no-trade to 2 units of car in free trade.
f. Foreign workers earn less than those at Home as measured in term of their
ability to purchase goods because Home has an absolute advantage in both
goods. Although pattern of trade is determined by comparative advantage,
real wage is determined by absolute advantage. In other word, Home pays
higher wage since it has better technology in both goods than Foreign.
8/ To engage to international trade, a country must have a minimal threshold of
productivity. Although China is a low-wage country, it has a comparative advantage
from the abundance of labor which has the productivity necessary to compete with
others like US successfully.
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Chapter 4
3/
a. Since
W.Lc
R.Kc
=
60
40
= 1.5 > 1 =
50
50
=
W.Ls
R.Ks
 Shoe industry is capital-intensive.
b.
∆R
R
∆R
R
=(
=(
∆P
)(
P
∆P
P
)(
Pc. Qc
R.Kc
Ps. Qs
R.Ks
∆W
W.Lc
∆W
W.Ls
) - ( W ) ( R.Kc ) , for computers.
)-(
W
)(
R.Ks
) , for shoes.
Then, from the provided data, we have:
∆R
R
=0-(
∆W
50
) (50) , for computers. (1)
W
∆R
R
= 50%. (
100
(2) – (1), we have: 0 =


∆W
W
∆R
R
∆W
5
)- ( W ) (95) , for shoes. (2)
95
10
19
+
18 ∆W
19
.
W
= - 55.56%
= 55.56% is the percentage change in rental on capital.
c. As seen in the percentage change calculation for the rental of capital in the
shoe industry, the magnitudes of the changes that compare with that of
labor, are equal with opposite side.
d.
-
Because the increase in capital returns (+ 55.56%) exceeds the price
changes in both industries, capital gains in real terms.
-
Because these in a decrease in wage (- 55.56%), labor loses in real
terms.
-
These results are consistent with the Stolper-Samuelson theorem,
since Stolper-Samuelson theorem said that: Trade leads to an increase
in the return to a company’s abundant factor and a decrease in the
return to its scarce factor.
5/ Due to labor abundant country, Foreign will increase the production of laborintensive products – shoes. This causes an increase in relative price of shoes and
decrease in relative price of computers, which leads to rightward shifting of relative
demand curve from RD1 to RD2. At new equilibrium point B, computers are
weighted less, shoe becomes weighted more. As a result, the relative wage also
increases, which also leads to labor-capital ratio decreases in both industries.
W/R
𝐿
𝐾
RD1 RD2
Lc
Kc
B
W/R2
A
W/R1
Ls
Ks
Ошибка! Закладка не определена.
L/K
(Lc/Kc)2 (Lc/Kc)1
(Ls/Ks)2 (Ls/Ks)1
6/
a. According to the Heckscher-Ohlin theorem, Russia is labor abundant, because
it imports the capital-intensive goods.
b. Russia will specialize in the labor-intensive product, which will lead to an
increase in relative price for labor in the labor-intensive industry. This causes
an increase in the relative wage. The higher relative wage cuts the number of
workers hired per unit of capital in the labor-intensive industry, thereby
reducing labor-capital ratio. By the law of diminishing returns, the decrease in
the labor-capital ratio in both industries leads to the rise of the marginal
production of labor in both industries. Thus, the real wage will increase in
Russia following trade.
c. The real rental on capital will decrease because the world relative price of
automobiles is lower than Russia’s no-trade relative price. More specifically,
because labor-capital ratio decreases in both industries, the marginal
production of capital also decreases. Therefore, the real rental on capital falls.
d. The capital owners will support policies to limit free trade because they suffer
a loss, due to the decrease in the relative price of automobiles when Russia
engages in trade.
---------------------------------------------------------
Chapter 7
10/ The tire manufacturers operating in the US, such as Goodyear, Michelin,
Cooper, and Bridgestone, do not support the imported tariff, because many of them
already have manufactured tires in China. Ten manufactures operate in the US,
seven of them manufacture tires in China, so a tariff on ties imported from China
would make it more costly for them to produce in China.
11/
a. Home under no-trade:
CS =
PS =
1
2
1
2
. (14-9).5 = 12.5
. (9-4). 5 = 12.5
b. Home under free trade:
CS* =
1
2
. (14-6). 8 = 32
PS* =
1
2
. (6-4). 2 = 2
Home total surplus in no-trade: TS = CS + PS = 12.5 + 12.5 = 25
Home total surplus under free trade: TS*= CS* + PS*= 32 + 2= 34
Change in total surplus compared with no-trade:
TS = TS* - TS = 34 – 25 = 9 > 0
So, Home gains from trade.
c. Home government imposes tariff:
CST =
PST =
1
2
1
2
. (14-8). 6 = 18
. (8-4). 4 = 8
G= (6-4). (8-6) = 4, Government revenue
TST = CST + PST + G= 18 + 12 + 4= 34
Change of Home after imposed tax, compared with free trade:
CS’ = CST – CS* = 18 – 32 = -14
PS’ = PST – PS* = 8 – 2 = 6
G = 4
TS’ = CS’ + PS’ + G = -14 + 6 + 4 = -4
Thus, Net effect on Home welfare is TS’ = -4
13/
a.
Home market
Import market
Price
Price
Foreign export
supply with quota
S
A
C
Pd
a
c
c
Foreign export
supply, X*
b
Pw
b+d
d
B
Home import
demand, M’
D
S1
S2
D2 D1
Quantity
M2
M1
Quantity
In the small country, tariff revenue is the tariff per import times the amount of
imports subject to the tariff. This is area c and is collected as government
revenue under a tariff. Under the quota, this area equals the difference
between the domestic price Pd and the world price Pw, times the quantity of
imports M2. We call the difference between these two prices the rent
associated with the quota. Hence, the area c represents the rectangle of quota
rents.
b. If the quota rents are retained domestically and are not wasted by rent-seeking
(that is, they are collected by government through auction or given to Home
firms), Home’s welfare is the same as under the tariff. If quota rents are given
to the foreign country, then Home’s welfare falls by the amount of rents.
c. Given that the Foreign country’s welfare decreases with the addition of a
tariff on its exports to Home, Home can make the situation more politically
palatable to Foreign by implementing a TRQ and giving away the quota rents
to Foreign firms. Alternatively, the home producers can be given even larger
gains if they are given the quota rents.