Question

1. Do you agree or disagree with the following statements

a. Balanced trade is the difference between exports and imports

b. If country A can out produce country B, then country A has no reason to trade

c. Every country in the world experiences free trade

d. There is no connection between Foreign direct investment and trade flows

e. An accurate way to measure imports is to assign the value of a final good

2. Trade distortion effects increase estimates of the United States’ trade deficit with China. To what degree do you agree or disagree with this statement. Be sure to provide reasons why.

3. The magnitude of trade deficits a country has is an indicator that they have engaged in

harmful trade deals and they must renegotiate all trade agreements or better yet, retreat

from globalization. Do you agree or disagree with this statement? Why or why not?

4. Please solve the following problems and show your work for full points

a. The trade-to-GDP ratio for a nation that had $200 million in exports, $300 million in imports, and GDP of $2,000 million would be ___________

b. If export to GDP ratio is 0.1 and import to GDP ratio is 0.22, then trade to GDP ratio is _____________

c. If a country has a trade to GDP ratio of 0.8 with exports of 800 million and imports of 900 Million, its GDP would be _____________

d.Suppose a country’s GDP increases by 2%, but its trade flows remain the same. If its previous trade to GDP ratio was 0.4, what is the country’s new trade to GDP ratio?

5. Given your recent exposure to the Ricardian model, answer the following questions

a. Can one country have comparative advantage in all goods? Why or why not?

b. Suppose it has been determined that a country has comparative advantage in the production of Adamantium and a comparative disadvantage in vibranium,

i. Does the Ricardian model predict that the wages in the Vibranium industry will increase? Why or why not?

ii. Does the Ricardian model predict partial specialization in the Vibranium industry? Why or why not?

6. Suppose that: In Malaysia the unit labor requirement (ULR) to produce a pound of rice and a pencil are 2 and 4 hours of labor respectively; In Indonesia, the unit labor requirement to produce a pound of rice and a pencil are 4 and 6 hours respectively; each country has 20,000 hours of labor to allocate between the production of rice and pencils; and in autarky, Malaysia consumes 5,000 pounds of rice and 2,500 pencils. When trade occurs, the world relative price of rice becomes 3/5.

a. Given that the marginal product of labor is the inverse of unit labor requirements, i.e. MPL = 1/ULR, derive the relationship between price ratio and the ratio of unit labor requirements. (hint: remember that w = P * MPL and that in autarky wages in both sectors are equal)

b. Which country has the better technology?

c. What are the autarkic (pre-trade) relative prices of rice and pencils respectively in each country?

d. How many work hours are employed in the Pencil and Rice sector respectively in Malaysia?

e. In which product will each country specialize?

f.When specializing, how many units of rice and pencils will Malaysia produce? (hint: obtain total labor hours available from your answer in

part d. above)

7. How does the specific factors model differ from the Ricardian model? (list at least 3 for

full points)

8. Suppose that land is specific to agriculture, capital is specific to manufacturing, and labor is mobile between sectors. If there is an increase in the amount of capital, holding the prices of agricultural and manufacturing goods constant, what happens to the equilibrium nominal wage rate and labor allocation? What happens to the rental rate of capital? What happens to the rental rate of land?

Answer 1

Question 1

a) Agree.

This is because the balance of trade is the difference between exports and imports value of a country for a specific time period.

b) Disagree

This is because even though country A has an absolute advantage in a product; It is not important that it does have a comparative advantage in the same product with country B.

c) Disagree

Not all countries experience free trade, there are countries with protectionism and isolationism trade policies.

d) Disagree

There is a connection between FDI and trade flows, it can either be as substitutes for each other or as complements.

e) Agree

This is because import goods take values of finished goods for measurement in trade.