International Trade Homework #1
(Chapters 2, 3 and 4)
Article: “Evolution of Korea’s Export Items”
1. Based on what we have been learning, make sense of the evolution of Korea’s export items.
What is the pattern and why?
In chapter 2, most countries tend to move past the trade in commodity products and on to manufactured
goods over time. Additionally, manufactured goods tend to move towards more value added products over
time. Korea’s export items demonstrates both of these trends when looking at the last 4 to 5 decades.
2. With whom do you suppose Korea traded those items in the past decades? Are these
assumptions based more off of the gravity model or the Ricardian model? Why?
To a degree, you could claim that both assumptions are accurate. In terms of the gravity model, Korea’s
primary trading partners over the past several decades were the US, Japan and China which would be some
of the largest economies in the world and meet the general distance criteria as well for the most part. In
terms of the Ricardian model, although it is rather simplistic, Korea, especially in the past, focused on goods
in which it had a comparative advantage versus the other nation.
Chapter 2
1. Canada and Australia are (mainly) English-speaking countries with populations that are not too
different in size (Canada is 60% larger). But Canadian trade is twice as large, relative to GDP,
as Australia’s. Why should this be the case?
We saw that not only is GDP important in explaining how much two countries trade, but also, distance is
crucial. Given its remoteness, Australia faces relatively high costs of transporting imports and exports,
thereby reducing the attractiveness of trade. Since Canada has a border with a large economy (the US)
and Australia is not near any other major economy, it makes sense that Canada would be more open and
Australia more self-reliant.
2. Over the last few decades, East Asian economies have increased their share of world GDP.
Similarly, intra-East Asian trade – that is, trade among East Asian nations – has grown as a
share of world trade. More than that, East Asian countries do an increasing share of their trade
with each other. Explain why, using the gravity model.
As the share of world GDP which belongs to East Asian economies grows, then in every trade
relationship which involves an East Asian economy, the size of the East Asian economy has grown. This
makes the trade relationships with East Asian countries larger over time. The logic is similar for why the
countries trade more with one another. Previously, they were quite small economies meaning that their
markets were too small to import a substantial amount. As they became more wealthy and the
consumption demands of their populace rose, they were each able to import more. Thus, while they
previously had focused their exports to other rich nations, over time, they became part of the rich nation
club and thus were targets for one another’s exports. Again, using the gravity model, when South Korea
and Taiwan were both small, the product of their GDPs was quite small meaning despite their proximity,
there was little trade between them. Now that they have both grown considerably, their GDPs predict a
considerable amount of trade.
3. A century ago, most British imports came from relatively distant locations. Today, most British
imports come from other European countries. How does this fit in with the changing types of
goods that make up world trade?
As the chapter discusses, a century ago, much of world trade was in commodities that in many ways
were climate or geography determined. Thus, the UK imported goods that it could not make itself. This
meant importing things like cotton or rubber from countries in the Western Hemisphere or Asia. As the
UK’s climate and natural resource endowments were fairly similar to those in the rest of Europe, it had
less of a need to import from other European countries. In the aftermath of the Industrial Revolution,
where manufacturing trade accelerated and has continued to expand with improvements in transportation
and communications it is not surprising that the UK would turn more to the nearby and large economies
in Europe for much of its trade. This is a direct prediction of the gravity model.
Chapter 3
4. “Chinese workers earn only $.50 an hour; if we allow China to export as much as it likes, our
workers will be forced down to the same level. You cant import a $10 shirt without importing
the $.50 wage that goes with it.” Discuss.
This statement is just an example of the pauper labor argument discussed in the chapter. The point is that
relative wage rates do not come out of thin air; they are determined by comparative productivity and the
relative demand for goods. The box in the chapter provides data which shows the strong connection
between wages and productivity. China’s low wage presumably reflects the fact that China is less
productive than the United States in most industries. As the test example illustrated, a highly productive
country that trades with a less productive, low-wage country will raise, not lower, its standard of living.
5.
Italy and Greece both produce loaves of bread and bottles of olive oil. Suppose that an Italian
worker can produce 10 loaves of bread of 5 bottles of olive oil per hour. Suppose that a Greek
worker can produce 8 loaves of bread of 8 bottles of olive oil per hour.
A. Draw a production possibilities frontier curve for both workers.
B. Which country has the absolute advantage in the production of each good? Which country
has the comparative advantage?
Italian workers have an absolute advantage over Greek workers in producing bread, because Italian workers
produce more loaves per hour (10 vs. 8). Greek workers have an absolute advantage over Italian workers in
producing olive oil, because Greek workers produce more olive oil per hour (8 bottles vs. 5 bottles). Comparative
advantage runs the same way. Italian workers, who have an opportunity cost of 1/2 bottle of olive oil per loaf of
bread (5 bottles of olive oil per hour divided by 10 loaves of bread per hour), have a comparative advantage in
bread production over Greek workers, who have an opportunity cost of 1 bottle of olive oil per loaf of bread (8
bottles of olive oil per hour divided by 8 loaves of bread per hour). Greek workers, who have an opportunity cost of
1 loaf of bread per bottle of olive oil (8 loaves per hour divided by 8 bottles per hour), have a comparative
advantage in the production of olive oil over Italian workers, who have an opportunity cost of 2 loaves per bottle
(10 loaves per hour divided by 5 bottles per hour).
C. If Italy and Greece decide to trade, which commodity will Italy trade to Greece? Explain.
If Italy and Greece decide to trade, Greece will produce olive oil and trade it for loaves of bread produced in Italy. A
trade with a price between 1 and 2 loaves of bread per bottle of olive oil will benefit both countries, as they will be
getting the traded good at a lower price than their opportunity cost of producing the good in their own country.
D. If a Greek worker could produce only 5 bottles of olive oil per hour, would Greece still
benefit from trade? Would Italy still benefit from trade? Explain
Even if a Greek worker produced just 5 bottles of olive oil per hour, the countries would still gain from trade,
because Greece would still have a comparative advantage in producing olive oil. Its opportunity cost for olive oil
would be higher than before (1 3/5 loaves per bottle, instead of 1 loaf per bottle before). But there are still gains
from trade because Italy has a higher opportunity cost (2 loaves per bottle).
Chapter 4
6. Compare/contrast the gravity model, Ricardian Model and the Specific Factors Model.
Gravity
Ricardian
Specific Factors
Number of countries
Not Applicable (NA)
2
2
Number of Factors
NA
1
3
Number of goods
NA
2
2
Affecting criteria/focus
GDP size / Distance
Productivity of factor use Shows effects on income
(other
factors,
ie.
distribution
Language, etc. can also
be potential criteria)
Everyone better off?
Assumption is yes
Yes
Yes
BUT, specific groups can
be hurt. Owner of the
specific
factor
least
intensely used will be
worse off.
Can predict who trades?
Yes
Yes
Yes
Can predict what traded?
No
Yes
Yes
Can predict amounts of No
yes
Yes
goods traded?
Etc.
7. Why are there diminishing returns within the Specific Factors Model?
Please provide a real life
example of this phenomenon.
Diminishing returns is a part of the specific factors model due to the fact that there are two factors involved.
The book uses labor and capital as an example. Diminishing returns occurs because as the number of
workers increases and the capital does not, each additional worker produces an ever decreasing marginal
product of labor. This decreasing marginal product of labor results in the diminishing returns. Examples can
be found in any factory, store or restaurant setting. In many cases, additional workers can actually increase
the returns, eventually, as more workers are added, diminishing returns will always happen.
8. A. Explain the concept of relative prices and how they affect the distribution of labor. B.
Applying this idea to Korea, do you think it would be better to be a land owner or an owner of
capital?
If the relative price of a good increases versus another good, there will be a growth in the wage rate.
Although the wage rate may not grow at the same rate (due to diminishing returns), it will still grow
disproportionally larger than the wages associated with the opposing good. Due to the increase in the wage,
more workers will begin moving towards that sector. Applying this concept to Korea, assuming the prices
associated with technological goods rises higher or faster than that over agricultural products, more workers
will move towards the manufacturing sector. Since the factor specific to the sector whose relative price
increases is better off, Korean owners of capital would enjoying this state much more than the land owners.
9. A. If Korea allowed the mass immigration of unskilled labor to Korea from a South East Asian
nation, describe the theoretical changes that will occur in real wages (both in Korea and the
foreign nation) and overall world output.
B. Will this immigration be a good thing for everyone?
A. As more unskilled labor immigrated to Korea, there would be a definite drop in the real wages
earned in Korea for that part of the employment sector due to the increase supply. At the same time,
there would be a corresponding increase in the real wages in the South East Asian nation as the
number of workers decrease.
B. This situation would not be a good thing for Korean unskilled laborers. As the number of unskilled
workers grows, the real wages drop and Korean laborers would have less buying power with their
money.