Reference no: EM131068691

1. Some politicians and trade activists argue that developing countries should not participate in the global economy as their industries cannot compete with their Western counterparts. According to these observers, trade does not benefit the developing countries and will only result in the exploitation of the labour force. Let's analyze this argument in a simple Ricardian framework. Suppose there are only two countries, Indonesia and the USA, producing only two goods, clothes and machines. Labour is the only factor of production. The following table shows how many man-hours are needed in Indonesia and the USA to make one unit of cloth or one machine. Assume that 2,000 man-hours are available in the USA and 36,000 in Indonesia.

	Indonesia	USA
Cloth	50	3
Machine	100	5

a. Explain which country has a comparative advantage in which product.

b. What is the autarky price of machines in Indonesia and the USA?

c. Indicate exactly what range of prices for machines should be offered on international markets for both countries to be profitable from international trade. What will Indonesia and the USA import and export?

d. If both countries trade with each other, what is the maximum and minimum difference between the wage rate in Indonesia and the USA?

2. Since Deng Xiaoping took over leadership of China in 1977, tariffs have decreased dramatically. In 2001, China even joined the World Trade Organization (WTO), sending a signal to the world that tariff reduction will continue in the future. The effects of the opening up of China to international trade are heavily debated within the media. Some commentators claim that trading with China is a good thing because products become cheaper. Others stress the negative effect it has on some Western industries, such as the clothes industry.

Let's analyze the integration of China in the world economy with the Heckscher-Ohlin model. Assume, to make things easy, that there are only tow countries: China and the Western world (the Western world is considered to be one country). China is relatively labour abundant and the Western world relatively capital abundant. Furthermore, assume that only two goods are consumed and produced in China and the Western world. There are clothes (produced relatively labour intensively) and computer (produced relatively capital intensively).

a. Draw a consistent graph in which you indicate the autarky production and consumption points of China and the Western world with the help of production possibility frontiers and utility curves.

b. Explain intuitively whether the relative price of clothes in the Western world is higher or lower compared with the relative price of clothes in China when both China and the Western world are in autarky. How can you see this price difference in your graph?

c. Explain what will happen to the prices of clothes and computers in the Western world when the Western world and China start trading.

d. What effect will this have on the consumption of clothes and computers and on the production of clothes and computers in the Western world? Indicate the new consumption and production point in the graph with the help of a budget line and a new utility curve (if your graph becomes messy, please draw a new graph.)

3. The EU is considered to be a "large" country in this question. In the 1980s, Japanese producers began to export many cars to the EU. To protect their domestic car industries. The governments of the EU countries pushed for protective tariffs. We analyze the impact of these tariffs in a partial equilibrium framework.

a. What makes a partial equilibrium analysis "partial"?

b. Draw a partial equilibrium figure of the EU car market. Indicate clearly the volume of Japanese imports before and after the imposition of the tariff.

c. Is the tariff welfare improving for the EU? Why, or why not?