Econ 4431W – International Trade – Summer 2014
Homework #3
Quiz Date: 7/23/2014, 9:00 AM
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1) State the Rybczynski theorem. Then, in a two-factor, two-good Heckscher-Ohlin
context, illustrate graphically and explain the “production effect” of growth in the labor
force in a relatively capital-abundant country, other things equal.
2) Define “immiserizing growth”. Then explain how “immiserizing growth” could or could
not happen in the following situation: Large, relatively capital-abundant country that
experiences growth in the capital stock, other things equal (again, we are in a 2-good
Heckscher-Ohlin context).
3) Suppose you are in a two factor (Capital and Labor), two goods (Wine and Cars), small
open economy. Cars’ production uses capital intensely, Wine uses labor intensely. The
small open economy, which is relatively abundant in labor, has factor specific growth in
labor. An econometrician tells you that the elasticity of demand for imports (YEM) for
the small open economy is between 0 and 1.
The consumption effect on factor specific growth must be either “pro-trade” or ultrapro trade: True or False? Explain in words why and then draw a graph to motivate your
answer.
4) New manufacturing technologies are often viewed as labor saving. Using a PPF with
manufactured goods on one axis and labor intensive services on the other axis, illustrate
and explain how the introduction of labor-saving innovations in manufacturing would
shift the PPF. What type of production effect would occur at constant world prices
(Assuming that the country is an exporter of the manufacturing good)?
5) Discuss how a weighted-average of tariff rate might be misrepresenting the average
level of protection in a country. Compare this system to an unweighted-average.
6) Construct a numerical example in which ERP<tariff on final good. Discuss why – in
general – developing countries oppose an escalated tariff structure in developed
countries, especially for manufacturing goods.
7) Suppose that, for a country, the free trade price of good X is $1,000 and the free trade
prices of the only two inputs (both of which are imported) to the production process of
good X are $400 for good W and $200 for good Y. Assume that one unit each of good W
and good Y is necessary for the production of one unit of good X. Suppose now that the
country, which is a “small” country, introduces a tariff structure that imposes a 20
percent nominal tariff on good X, an 8 percent tariff on good W, and a 6% tariff on good
Y. Calculate the Effective Rate of Protection (ERP), or “effective tariff rate,” that this
tariff structure provides to the domestic producers of good X. Explain the economic
meaning of your result. For what purpose might the ERP of an industry be more useful
to an economist than the nominal tariff rate on imports of the industry’s product?
8) Suppose that a country has a nominal tariff rate of 10 percent on good A and imports
$100,000 of good A, has a nominal rate of 5 percent on good B and imports $120,000 of
good B, has a nominal rate of 12 percent on good C and imports $80,000 worth of good
C, and has a prohibitive tariff rate of 50 percent on good D. These are the only four
goods in existence. Calculate the country’s unweighted-average nominal rate and its
weighted-average nominal rate. Explain in economic terms the relationship you have
found between the unweighted- and weighted-average rates.