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International Macro Economics and Finance Assignment -

Answer the following questions.

Question 1 - The table below shows the bushels of corn and bottles of wine that Japan and Korea can produce from one day of labor under three different hypothetical situations.

a. Use the table above to show for each case the commodity in which each country has a comparative advantage or disadvantage. Show your work. Answer the question by calculating the relative prices.

b. Indicate in each case whether trade is possible based on comparative advantage. Which commodity each country exports? You must explain your answer.

c. Suppose in case 2, Japan exchanges 4 bushels of corn for 4 bottles of wine with Korea.

1. How much does Japan gain? Show your work.

2. How much does Korea gain? Show your work.

3. What is the range for the terms of trade for corn? What will happen if the TOT for corn is ¾ of wine? Will nations trade and why.

Question 2 - With the constant level of world resources, international trade brings about an increase in total world output. Explain why this statement is true.

Question 3 - Can complete specialization take place under increasing cost opportunity? Explain why.

Question 4 - Assume production takes place under constant opportunity costs. Draw two sets of axes, one for Nation 1 and the other for Nation 2. Draw two identical PPS's, one for each country. Determine the comparative advantage for each country (nation I and nation II) if taste and preferences are different (i.e., each country has a different set of taste and preferences. Label you graph carefully.

Question 5 - Discuss the significance of the assumption of "identical preferences and tastes" in the factor endowment theory. Will the H.O theory collapse if tastes and preferences are different between the two nations? For the latter question, draw a graph to show it graphically. Explain

Question 6 - Suppose the foreign supply for good X is price elastic. Suppose further that the home country imposes a tariff on good X. Who pays the tariff? Consumers in the importing country? Producers in the exporting country? Explain carefully.

Question 7 - How does the elasticity of domestic demand and supply influence the size of the deadweight loss of an import tariff? What will happen to the deadweight loss as the demand and supply become price inelastic?

Question 8 - Which tends to result in a greater welfare loss for the home economy: (a) an import quota levied by the home government or (b) a voluntary export quota imposed by the foreign government? Elaborate your answer.

Question 9 - Describe why an import quota is far worse than an equivalent tariff in terms of welfare effect if the demand for the quota-constrained product increases over time. Do your analysis under two scenarios: (1) tariff, (2) quota. Do NOT draw a graph.

Question 10 - Assume that two nations trade with each other. The free trade price is $20 and the volume of trade is 75 units. Now introduce a $10 transport cost which will reduce the volume of trade to 35 units. Show that in the presence of transport costs, the steeper are the domestic demand and the supply curves for a tradable good, the greater is the burden of transport costs on the home nation. Discuss and show graphically.

Question 11 - Analyze the economic effect of a subsidy provided by the national government on a particular export commodity in a small nation. Draw a graph. Suppose at the free trade price of $400, the domestic production is 45 units and the domestic consumption is 20 units. A subsidy of $100 is granted to each unit exported. Production increases to 55 units and exports increase to 40 units. Calculate welfare effect of such policy (i.e., the loss in CS, the gain in PS, the cost of the subsidy, and the welfare loss).