Reference no: EM132298295

INTERNATIONAL TRADE ASSIGNMENT -

INTRODUCTION -

Assume that you are an economic consultant hired by an international organization/government to provide your expert advice on conditions pertaining to international trade in Italy and Sweden. Your analysis will consist of two separate reports. As an expert, your job is two-fold:

1. You are required to analyse any relevant issue using your technical skills. This involves utilizing your knowledge in international trade models as well as inspecting and interpreting data.

2. You need to communicate your results in an effective way.

The purpose of this exercise is to assess your aptitudes in each domain. You will evaluate the trading conditions in these countries (Italy and Sweden) based on the scenarios detailed in each question in this Assignment. Your analysis will form the basis for a short report to the international organization/government body---summarising your recommendations and the associated rationale.

DATA SOURCE -

For your data analysis, you first need to obtain data from the World Bank and follow the steps described below. Notice that World Bank regularly updates its database; therefore it is crucial to obtain all data as soon as possible. The data range is from 2003 to 2015.

You need to obtain the country-level data for Italy and Sweden on:

i. Imports of goods and services (in current US$)

ii. Exports of goods and services (in current US$)

iii. GDP (in current US$)

iv. GDP per capita (in current US$)

v. GINI Index (World Bank estimate) from the World Bank's World Development Indicators.

REQUIRED TASKS -

Your tasks involve two dimensions. First, you need to analyse the data (see Steps 1, 2 and 3 in the next section). Second, you also need to perform a technical analysis by considering a hypothetical trading environment based on Ricardian model (see Step 4 in the next section).

Accordingly, you are required to:

• Provide a visual representation of the relationship between openness and inequality by plotting a graph that shows the change in openness with respect to GINI index for these countries over the time period between 2003 and 2015.
• Establish how being integrated with the rest of the world affected inequality in these two countries by looking at the correlation between their openness and GINI index.
• State and explain whether your data findings are in line with theory (Hint: Both Italy and Sweden are skilled-labour abundant countries).
• Continue your technical analysis from your first report and state what would have happened to these countries once they are allowed to trade with each other based on our hypothetical scenario of Ricardian model.

IV. REQUIRED STEPS TO COMPLETE EACH TASK

DATA ANALYSIS

For data analysis, you need to follow Steps 1, 2 and 3 given below.

Step 1. Using data you obtained for Italy and Sweden, plot openness (as a percentage) against GINI index for each nation. Use two graphs, one for each country. You need to use your openness calculations from Step1 of Assignment 1). Put openness (as a percentage) on the vertical axis and GINI index on the horizontal axis.

Step 2. Using data you obtained for Italy and Sweden, calculate the correlation coefficient (using CORREL command in excel) between Openness (as a percentage) and the GINI Index for each nation. Report and interpret this relationship in up to 200 words and state for which country this relationship is stronger. [Hint: the GINI is often used as a proxy for the ratio of skilled to unskilled wages in empirical studies].

Step 3. Assume that both Italy and Sweden are skilled-labour abundant. First define, Stolper-Samuelson theorem and then check whether your data findings are in line with the Stolper-Samuelson theorem. Explain your answer up to 200 words.

TECHNICAL ANALYSIS -

For technical analysis, you need to follow Step 4.

Step 4. In order to conjecture the circumstances in these two countries under free trade, consider the following hypothetical scenario based on Ricardian model. Assume throughout that those two countries (Italy and Sweden) are the only two countries in the world, at least for purposes of trade. There are two goods: shoes and calculators. Consumers in both countries always spend half of their income on shoes and half of their income on calculators. The only factor of production is labour. Each Italian worker can produce 1 shoe or 2 calculators per unit of time. Each Swedish worker can produce 4 shoes or 2 calculators per unit of time. There are 80 workers in Italy and 60 workers in Sweden. You need to provide conditions in each country by stating:

a) Derive the relative demand curve relating the relative demand for calculators to the relative price of calculators. Do this algebraically, and then show what the curve looks like in a diagram (put the relative price of calculators on the vertical axis and the relative quantity of calculators demanded on the horizontal axis).

b) Derive the world relative supply curve of calculators (put the relative price of calculators on the vertical axis and the relative quantity of calculators supplied on the horizontal axis).

c) Put in the same figure the relative demand curve for calculators that you found in part (a) and the world relative supply curve of calculators that you found in part (b). Determine the equilibrium relative price of calculators and the equilibrium relative quantity of calculators under free trade.

d) Under free trade, which country produces which good(s)? How many units?

e) Who gains from trade? Who loses from trade? State labours' stance towards free trade in each country.