ECON-370-001 International Economics Problem Set # 1 Prof

Subject:EconomicsPrice:13.86 Bought3

Share With

ECON-370-001 International Economics Problem Set # 1 Prof. R. Blecker Fall 2021 Instructions: Due (via upload in Canvas) before class on Monday, September 20. Any combination of handwritten (scanned) and computer-printed answers is acceptable, all combined into one file in .docx or .pdf format (only). If you work with classmates, you must list the names of everyone you worked with. You are also welcome to consult the professor or TA in advance for help. 1. Suppose the world is divided into two regions, the Organization of Coffee Exporters (OCE) and Club of Coffee Importers (CCI). The diagrams below represent the domestic markets for coffee in each region and the world market (prices [P] are in U.S. dollars per lb.). You should reproduce these diagrams on your own sheets of paper (or in a computer document) so that you can draw on them and respond to the following questions. CCI World Market OCE P P P S S D $4 $0.50 D Q of coffee a. b. c. d. Q of coffee Q of coffee traded Draw the export-supply and import-demand for coffee curves on the World Market diagram. Be sure to indicate which “country” each curve is for, show the intercepts on the vertical (P) axis, and show how the equilibrium world price of coffee is determined (see part b. for how to find this price). Also show the quantities exported and imported on all three diagrams (not exact numbers, just how to find those on the diagrams). Look up on the internet (use Google or another search engine) what the current world price of coffee is (any price quote you find for August or September 2021 is fine). These should be prices for globally traded coffee, not retail prices! Note that coffee prices are usually reported in U.S. cents per lb., so divide by 100 to get dollars. Show this price on your diagrams from part a. Give the URL (link) for the website you consulted. Show how to measure the “gains from trade” in each region using these diagrams (indicate using areas labeled A, B, C, D). Who are the winners and losers in each country? Do both countries get net gains, or does one country gain at the expense of the other? (You don’t have to calculate exact numbers; just show these areas on the graphs and explain.) Suppose that global warming and covid outbreaks reduce the OCE’s supply of coffee. First, show which curve(s) shift(s) and how (which way), and then analyze the effect on the world price and the domestic market in CCI. HINTS: Start your analysis with the world market equilibrium you found in parts a. and b., but draw a new set of diagrams for this part. Begin by showing any shift(s) on the OCE diagram and then show how they affect the World Market and CCI. For this part, you can make up any feasible number for 1 the new world price (and the new autarky equilibrium price in OCE). e. What is the impact on economic welfare in the CCI only as a result of the supply shortage you analyzed in part d.? Who gains or loses, and is there a net gain or loss to CCI)? [You do NOT have to analyze welfare effects in OCE, as these are quite complicated.] 2. Use the Ricardian trade model to analyze trade between two countries, Germany and Poland, each of which can produce two goods, chemicals (C, measured in liters [l.]) and steel (S, measured in kilograms [kg.]), with “labor coefficients” (a) as shown in the following table: Hours of labor per unit of output Chemicals (l.) Steel (kg.) Germany 1 3 Poland 5 4 a. What is the relative price of chemicals (PC /PS) in each country in autarky? In what units is this relative price expressed? How does this relate to the concept of “opportunity cost”? b. Which country has the absolute advantage in each good in the sense of Adam Smith (lowest labor cost)? Which country has the comparative advantage in each good in the sense of David Ricardo? How do you know? c. Draw production possibility frontier (PPF) diagrams for both countries. Calculate the precise intercepts and slopes for the PPFs, assuming that each country has 1,000 personhours of labor and the labor is fully employed. HINT: Since we are looking at the relative price or opportunity cost of chemicals, put chemicals on the horizontal axis! d. Then, show (on your diagrams) how the countries specialize and trade, assuming that the “world” price ratio (international terms of trade) is (Pc/Ps)world = ½ = 0.5. You can use a “demand diagonal” (DD line) to find the consumptions points (no numbers are needed). Show (using letters like A, B, C for each country) the points where the countries produce and consume under autarky vs. free trade. e. Suppose that German wages are €20 per hour (where € = euros) and Polish wages are €10 per hour (also measured in euros for convenience). Using the formula Price = Wage rate (per hour) × Labor hours (per unit of good) determine which country has the lowest monetary price in each good (calculate all four prices, for each good in each country, and compare). Does Poland get an overall competitive advantage (i.e., absolute price advantages in both goods) because it has a lower wage? Why or why not? Analyze and explain. f. Take the ratio of the price of chemicals to the price of steel using the prices that you obtained in part d. for the exporting country for each good. Does this ratio constitute an international terms of trade (world price ratio) for chemicals that will allow both countries to gain from trade? (Hint: Compare with the world price assumed in part d.) g. Suppose a German chemical company builds a plant in Poland with productivity close to the German level (say, 1.5 hours of labor per liter of chemicals), but Polish wages stay the same—will that new plant be able to export chemicals from Poland? Calculate the export price from this factory and discuss! 2