ECON6016 International Trade
Office Hour: MS Teams By appointment (Room 58/3007)
ECON6016 International Trade 22-23 Graded Coursework
Please answer ALL FOUR questions and submit your group solutions by 5pm on Fri- day, 7/4/2023, through the submission link on Blackboard under the “Assignment” tab as a single pdf file. Please use MS Word etc. for wordy answers, but legible, handwrit- ten solutions are acceptable as well, in particular for mathematical derivations. Always explain your workings and answers. Please remember to properly reference, if basing (part of) your answer on academic literature or textbooks.
1. [20 marks] Suppose that China and Japan begin negotiating a bilateral free trade agreement in goods and services on top of the RCEP (Regional Comprehensive Economic Partnership). Would you prefer to use a Gravity model, a Ricardian model or a specific factor model to analyse the potential consequences of such an agreement for China? You can talk in general or be more specific (by focusing on the effect on a particular group of people). The answer should demonstrate your understanding of these three models and ability to contrast between them. Moreover, these differences should be associated with the case of China-Japan trade. A final conclusion has to be made in the ending paragraph. Explain your choice of model using no more than 300 words.
2. [50 marks] Consider a Ricardian model with two countries, home and foreign and two goods computers (c) and bicycles (b). Suppose that home as 400 workers and each worker can produce either 3 bicycles or 4 computers. Foreign has 200 workers and each can produce either 5 bicycles or 5 computers.
(a) Draw the PPFs for home and foreign with extreme points and sloped indicated on the diagram (with bicycles on the horizontal axis) [10 marks]
(b) Calculate home’s opportunity cost of producing computers, and foreign’s oppor- tunity cost of producing bicycles. Which good does home have a comparative advantage in and why? what about foreign? [10 marks]
(c) Now suppose that the world relative price of computers is (Pc )W = 7/8, what Pb
about the trade pattern? Calculate the real wage at home and foreign in terms of both goods, and compare them with the real wage after trade in the table below
1
(computation steps are required) and briefly comment on the result. [Hint:] you might want to refer to Q2(h) of Pbset2 before attempting this question. [10 marks]
Home’s real wage
In terms of computers
In terms of bicycles
Before trade
After trade
Foreign’s real wage
In terms of computers
In terms of bicycles
Before trade
After trade
(d) Starting from the example in L5 slides, now suppose that foreign’s population triples so that L∗ = 300, such that at its autarky relative price of PW∗ /PC∗ = 1, foreign is willing to import up to 150 units of wheat, rather than 50 units. As a result, home’s export supply curve intersects foreign’s import demand curve at a world equilibrium price of (PW /PC )W = 1, which corresponds to 90 units of wheat imports/exports. 1) Please re-draw figure 2.11 (slide 19 of L5) based on above descriptions, and make sure that your drawing reflects all the info provided. 2) Please re-draw the trade equilibrium at home, and label the production and consumption points, exports and imports with their quantities calculated. [Hint:] you might want to refer to Q4 of Pbset2 before attempting this question. [10 marks]
(e) Please re-draw the trade equilibrium at foreign and label the production and con- sumption points, exports and imports with their quantities calculated. Are there gains from trade in both countries? Explain why or why not? [10 marks]
3. [20 marks] Consider the Specific Factors model with two countries, Home and Foreign, with two goods, cloths (c) and higher education (e), and three factors, capital K, skilled labour S, and unskilled labour L. The production functions are given by
21 12 Qc = Fc(Kc,Lc) = Kc3 Lc3 and Qe = Fe(Le,Se) = Le3 Se3
That is, skilled labour is specific to higher education, and capital to cloths. Suppose that the countries’ factor endowments are KH = 1 = KF , LH = 1 and LF = 3/2, and SH = 1 and SF = 1/2, so that the total labour force is 2 in both countries. The price of capital is denoted by R, the nominal wage of skilled and unskilled labour by Ws and
2
Wu. Denote the goods’ prices by Pc and Pe, and normalise Pc = 1 for both countries for simplicity. The demand for cloth and education in country j = H, F is given by Xcj and X ej :
j1jj1Yj Xc=2Y andXe=2Pej,
where Y j denotes aggregate income in country j.
(a) Draw the PPFs of Home and Foreign with extreme points QHc , QHe , QFc and QFe computed. Please round fractions to 3 decimal places and place cloth on the horizontal axis. [Hint:] two extreme points for each country can be derived by assuming that ALL the mobile factor (in this case the unskilled labor L) is employed in either industry. [10 marks]
(b) Derive the autarky equilibrium in Home, and complete the following table. Calcu- lation steps are required. [Hint:] You should start by equalizing the nominal wage of the mobile factor (unskilled labor L) between two industries, from which you can derive LHe as a function of LHc ; by plugging this into the production functions, you can derive the relative supply QHc /QHe , and equate it with the relative demand XcH/XeH to solve for PeH. Given PeH, you can easily derive LHc and LHe given that they sum to 1. WuH, WsH, and RH are equal to the price of good * marginal prod- uct of the respective factor. Please round fractions to 3 decimal places. [10 marks]
PeH
LHc
LHe
WuH
WsH
RH
4. [10 marks] Using a diagram similar to Figure 4.8 (Slide 9 of L9), show the effect of a decrease in the relative price of computers at foreign. Will W∗/R∗ increase or decrease? Will L∗C/KC∗ and L∗S/KS∗ increase or decrease? Please label all these changes on your diagram using ↑, ↓, → or ←. [10 marks]
3
