Problem set 1wA

Problem set 1wA - < 1st Problem Set-Answer Keys > E 101...

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< 1st Problem Set- Answer Keys > E 101: International Trade (Summer II, 2008) 1. Discuss the relationship between the Globalization (characterized by the rapid development of IT industries and global tariff reduction through international market integration), and Gravity model in explaining the recent trends of international trade. O The recent trends of international trade can be characterized by Gravity model, ij j i ij D Y AY T = , which shows that the trade volume increases when the economic size of trading countries is bigger, and the distance (transaction costs) between trading countries are lower. - Globalization is characterized by i) sharp reduction of physical transaction costs by information and communication technology revolution, and ii) rapid reduction of legal and institutional transaction cost (as tariff and non-tariff trade barriers.). As a result of globalization, the physical and legal distance between trading country is sharply decreased, and this results in more rapid increase of the trade volume. 2. Consider a world with two countries, A and B, and two commodities, C and D, and one mobile factor, labor. In addition, units of labor requirement for the production of each unit of commodity are given as in the following table. Unit of labor requirement Commodity C Commodity D Country A a LC * = 4 a LD * = 8 Country B a LC = 6 a LD = 2 i) Which country has the absolute advantage in the production of Commodity C and D? (Explain why.) o Country A has absolute advantage in the production of commodity C, while country B has the absolute advantage in the production of commodity D because country A produce commodity C with a lower inputs than country B ( a LC * = 4 < a LC = 6), and country B can produce commodity D with a lower inputs than country A ( a LD * = 8 > a LD = 2). 1
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ii) Which country has the comparative advantage in the production of Commodity C and Commodity D? (Explain why.) o Country A’s opportunity cost of producing commodity C is lower than Country B’s opportunity cost to produce commodity C: ( a LC */ a LD * =4/8) < ( a LC / a LD =6/2). - Therefore, country A has comparative advantage in producing commodity C, and country B has comparative advantage in the production commodity D: ( a LD / a LC =2/6)< ( a LD */ a LC * =8/4). iii) Assume that the initial endowment of economic resources (labor endowments) of
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Problem set 1wA - < 1st Problem Set-Answer Keys > E 101...

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