Reference no: EM131014901

To answer the questions 1 and 2, first get the data and follow these steps.

1. Questions 1 and 2 require you to obtain data from Brazil and El Salvador.

2. Obtain country-level data on imports of goods and services (in current US$), exports of goods and services (in current US$), GDP at market prices (in current US$), GDP per capita (in current US$) from the World Bank's World Development Indicators (https://databank.worldbank.org/data/reports.aspx?source=world-developmentindicators).
[Note that if your browser (such as Google) does not open thewebpage, try a different browser (such as Internet Explorer)] 

3. For simplicity, use data measured in current US dollars ($) as indicated above. In addition, for openness calculation, use GDP at market prices (in current US$).

4. Pick data ranging from 1995-2012.  

Assignment 1

1. Calculate openness as a percentage for Brazil and El Salvador. Explain how you calculated openness. Using a graph of Openness (as a percentage) versus time, explain in up to 100 words how openness has changed for these countries from 1995 to 2012. Make sure your graph is properly labelled.

2. Explain in up to 100 words the relationship between Openness and economic development by calculating the correlation coefficient between GDP per capita (proxy for economic development) and Openness for Brazil and El Salvador, respectively. [Here you have to use the CORREL command in Excel].

3. Consider the following model of trade between Home and Foreign. Assume throughout that those two countries are the only two countries in the world, at least for purposes of trade. There are two goods: Handbag and Wallet. Consumers in both countries always spend half of their income on Handbags and half of their income on Wallets. The only factor of production is labour. Each home country worker can produce 2 Handbags or 1 Wallet per unit of time. Each foreign country worker can produce 3 Handbags or 3 Wallets per unit of time. There are 100 workers in Home and 50 workers in Foreign.

(a) Which country has an absolute advantage in Handbag? In Wallet?

(b) Which country has a comparative advantage in Handbag? In Wallet? 

(c) Draw the typical worker’s budget line in both countries (put Handbag on the vertical axis and Wallet on the horizontal axis).

(d) Draw the production possibility frontier for each country (put Handbag on the vertical axis and Wallet on the horizontal axis).

(e) Find the autarky relative price of Wallet in both countries (i.e., the price of Wallet divided by the price of Handbag).

(f) What is the optimal consumption and production for each country under autarky?