Homework 1
UCDavis, 160a, Fall 2011
Prof. Farshid Mojaver
Some Trade Terminology
1. What does autarky mean?
2. What is a “laissez faire” policy with respect to trade?
3. Is export promotion considered to be a “laissez faire” policy? If not then what is it?
4. In the trade spectrum show autarky, free trade, export promotion, and a move
toward protectionism/trade liberalization.
5. What is protectionism? What is being protected and against what?
6. What is trade liberalization? What is being liberalized?
Pure Exchange Model
Consider two farmers, one with an endowment of 5 pounds of peaches, the other with an
endowment of five pounds of cherries. Suppose these two farmers meet daily and make a
mutually agreeable exchange of 2 pounds of peaches for 3 pounds of cherries.
a. Write down an expression for the terms of trade. Explain how the terms of trade
relates to the dollar prices of the two goods.
b. Consider the following shocks (or changes). Explain how each of these shocks may
influence the terms of trade between the farmers. Assume that each farmer's sole
interest is to maximize her own utility.
1. The cherry farmer arrives at the market with 5 extra pounds of cherries.
2. The peach farmer has just finished reading a book titled "How to Influence
People."
3. Damp weather causes mold to grow on 40% of the peaches.
4. News reports indicate that cherry consumption can reduce the risk of cancer.
Feenstra Ch1 Problems
1. Figures 1-2 and 1-7 rely on data from the year 2006, and Figure 1-6 relies on data
from 2005, to map worldwide trade, migration, and foreign direct investment. Updated
data for migration and foreign direct investment were not available at the time of writing
this chapter, but are available for worldwide trade. In this question you are asked to
update the numbers for world trade shown in Table 1-1.
a. Go to the World Trade Organization website at www.wto.org and look for their trade
data under “Resources” and “Statistics.” Look for the most recent edition of their
International Trade Statistics publication,
http://www.wto.org/english/res_e/statis_e/its2010_e/its10_world_trade_dev_e.htm
Then go to “Trade by Region” and find the Excel spreadsheet
•Table I.4 Intra- and inter-regional merchandise trade, 2009
Print out this table.
b. From this table, what is the total amount of trade within Europe? What percentage is
this of total world trade?
c. What is the total amount of trade (in either direction) between Europe and North
America? Add that to the total trade within Europe, and calculate the percentage of
this to the world total.
d. What is the total amount of trade within the Americas (i. e., between North America,
Central America, South America, and within each of these regions)? What
percentage is this of total world trade?
e. What is the total value of exports from Europe and the Americas and what
percentage is this of the world total?
f. What is the total value of exports from Asia, and what percentage is this of the world
total?
g. What is the total value of exports from the Middle East and the Commonwealth of
Independent States2 and what percentage is this of the world total?
h. What is the total value of exports from Africa, and what percentage is this of the
world total?
i. How do your answers to (b) through (h) compare with the shares of worldwide trade
shown in Table 1-1?
2. The quotation from Federal Reserve Chairman Ben Bernanke at the beginning of the
chapter is from a speech that he presented in Jackson Hole, Wyoming, on August 25,
2006, entitled “Global Economic Integration: What’s New and What’s Not?” The full
transcript of the speech is available at
http://www.federalreserve.gov/newsevents/speech/bernanke20060825a.htm
Read this speech and answer the following questions:
a. List three ways in which international trade today is not that different from the trade
that occurred before World War I.
b. List three ways in which international trade today does differ from the trade that
occurred before World War I.
The Ricardian Model 1
1- What is absolute advantage?
2- What is comparative advantage?
3- Why would a country with absolute advantage in every industry trade with a
country that has no such advantage in any industry? If they trade what should the
exports of the more productive country? less productive country?
The Ricardian Model 2
Problem 1
Use the information in the table to answer the following questions.
Beer
Pizza
Italian labor productivity
6 bottles/hour
6 pizzas/hour
German labor productivity
5 bottles/hour
3 pizzas/hour
a. Which country has the absolute advantage in beer? ... in pizza? Explain why.
b. Explain why Italy's comparative advantage good is the one it can produce "most best",
while Germany's comparative advantage good is the one it can produce "least-worse".
c. What autarky price ratios (PB/PP) would prevail in each country? Explain.
d. Explain how price differences signal the expansion and export of a country's
comparative advantage goods and the contraction and import of a country's comparative
disadvantaged goods.
e. What does the model suggest will happen to employment levels in the export and
import industries? In the model what happens to the overall level of unemployment in the
economy after a country moves to free trade? Explain briefly.
Problem 2
Consider trade between two countries, Home and Foreign. Denote values associated with Foreign using
asterisks. Each country is capable of producing consumer goods X and Y. Each country is endowed
with 1000 worker hours (L=1000=L*). The table below gives the unit input requirement in each
country for each good:
Home
Foreign
X
aLX= 1
aLX*= 1/4
Y
aLy= 1/2
aLy*= 1
a. What is the opportunity cost of producing good X in the Home country? In Foreign?
b. Assume that each consumer likes to consume some of each good. What is the relative
price of good X at Home in autarky? In Foreign?
c. Draw Home's production possibility frontier (PPF); put output of good X on the
horizontal axis and output of good Y on the vertical. Be sure to label intercepts and axes,
and indicate the slope. Do the same for Foreign.