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- 5. Suppose a capital abundant country, such as Germany, is entering a free trade agreement with a resource- rich country such as Norway. (YOU DO NOT NEED TO USE A DIAGRAM FOR THIS QUESTION) (a) Explain the pattern of trade, as predicted by Heckscher Óhlin Theorem, between these two nations if they have the same technology and same taste. (b) Explain what happens to price of exports and imports in each country in the post-trade environment. (c) Does trade between these two countries create winners and losers? Explain your answer by discussing what happens to real wages and real returns to resources in these nations. (d) Does the concept of "magnification effect" as predicted by Stolper- Samuelson Theorem apply to your answer in part (c)? Why?(Figure: Market for Engines) If there is international trade in the market and the world price of an engine is $800, what do areas a and b represent in the figure below?2
- 6. The arguments for restricting trade Suppose there is a policy debate over whether the United States should impose trade restrictions on imported tires: The president of the United States argues that the government should impose a tariff on tires because they are a necessary input into the production of various weapons. Free trade would make the United States overly dependent on foreign countries for the supply of tires. In case of a war, the United States might not be able to make or purchase enough tires and, therefore, would not be able to make enough weapons to defend itself. Which of the following justifications is the president using to argue for the trade restriction on tires? Jobs and income argument Infant-industry argument OUsing-protection-as-a-bargaining-chip argument O Unfair-competition argument National-defense argumentPlease answer all parts of the questions.(A & B) Thank you. A. Suppose American car manufacturers can produce model Falcon cars for $25000, which can also be imported from Japan at $25,000. US manufacturers need to import $15000 worth of materials from the rest of the world to produce the cars. What are the domestic value-added, the nominal and the effective rates of protection? Suppose the US puts a 15% tariff on imported Falcon cars from Japan. What is the effective rate of protection? Suppose in addition to the 15% tariff mentioned in (2), USA also puts a 10% tariff on parts from the rest of the world? What is the effective rate of protection? B. Discuss two arguments in favor of and against ‘the Labor Argument’ of protection.5. The price of trade Suppose that Ireland and Liechtenstein both produce beets and wheat. Ireland's opportunity cost of producing a bushel of wheat is 5 bushels of beets while Liechtenstein's opportunity cost of producing a bushel of wheat is 11 bushels of beets. By comparing the opportunity cost of producing wheat in the two countries, you can tell that Ireland production of wheat and Liechtenstein has a comparative advantage in the production of beets. Suppose that Ireland and Liechtenstein consider trading wheat and beets with each other. Ireland can gain from specialization and trade as long as it receives more than of beets for each bushel of wheat it exports to Liechtenstein. Similarly, Liechtenstein can gain from trade as of wheat for each bushel of beets it exports to Ireland. long as it receives more than Based on your answer to the last question, which of the following prices of trade (that is, price of wheat in terms of beets) would allow both Liechtenstein and Ireland to…
- 7. Lobbying for or against trade restrictions Trade restrictions affect the overall welfare of an economy, sin'ce they change the price consumers pay for a good and the quantity produced and consumed domestically. Trade restrictions, such as quotas, usually benefit domestic ▼ and hurt domestic since they the domestic price of a good. True or False: Producers find it difficult to exert the political influence needed to establish trade restrictions, because the benefits to producers are very small and widely dispersed, which makes it difficult for producers to organize. O False O True1. The basis of trade Suppose that Germany and Portugal both produce cheese and wine. Germany's opportunity cost of producing a bottle of wine is 2 pounds of cheese. That is, Germany forgoes the production of 2 pounds of cheese when it produces a bottle of wine. Portugal's opportunity cost of producing a bottle of wine is 1/2 pound of cheese. a comparative advantage in the production of wine. a comparative advantage in the production of cheese.4. ‘The world’s poorest countries cannot find anything to export. There is no resource that is abundant, certainly not capital or land, and in small poor nations such as Guatemala, not even labour is abundant.’ Discuss (assume Guatemala is the poor country and United states is the rich country)
- 4. Specialization and trade When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other. The following graphs show the production possibilities frontiers (PPFS) for Maldonia and Lamponia. Both countries produce lemons and sugar, each initially (that is, before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of sugar, as indicated by grey points (star symbols) labeled point A. SUGAR (Millions of pounds) 48 42 38 30 24 18 PPF 12 8 0 0 8 1 Maldonia 12 18 24 30 36 LEMONS (Millions of pounds) 42 48 ? Maldonia has a comparative advantage in the production of production of advantage), the most the two countries can produce is SUGAR (Millions of pounds) 48 42 36 30 24 18 12 6 0 0 PPF 6 Lamponia A 12 18 24 30 36 42 48 LEMONS (Millions of pounds) ? , while…28. Which country is exporting wine? a) Portugal b) England c) Neither d) Both e) Cannot tell2. The arguments for restricting trade Suppose there is a policy debate over whether the United States should impose trade restrictions on imported ball bearings: The president of the United States explains that it is necessary to impose trade restrictions, such as a tariff, on the ball-bearing industry to protect workers in the domestic ball-bearing industry. The president claims that without trade protection, there will be layoffs, causing many U.S. workers in the ball-bearing industry to be unemployed. Which of the following justifications is the president using to argue for the trade restriction on ball bearings? Infant industry argument O Cheap foreign labor argument National security argument Employment argument
