Problem1_answers - Prof. Anca Cristea Answers:...

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Unformatted text preview: Prof. Anca Cristea Answers: Problem Set 1 EC 481/581 Spring 2011 Part A: Net work Go to the following website: It reports detailed international trade statistics for the United States and Canada. Look for trade data under the tab “Search By Product”. Using the drop ­down menus, request data on total imports in year 2006 by the U.S. from the top ten trading partners in a given product category of your choice. To pick a product, under the “Product Search” menu choose the “Browse List” option and select a product out of the 116 records retrieved (e.g., 57 ­ Carpets and Other Textile Floor Coverings); then return to the main menu. Once you have completed the query hit “Run Report”. For the chosen trade product, list the top ten countries selling it to the U.S. For each country, state the reason(s) why you believe that country exports this product to the United States. Answer: Products HS 57  ­ Carpets and Other Textile Floor Coverings Period Specific Year(s): 2006 Top 10 Exporters of carpets and other floor textiles to the US: Country Import value Reason for trade India 602,775 Technology + resources (silk, other textile inputs) China 347,717 Labor resources (as main factor of production) Canada 192,976 Proximity to the U.S. + low trade barriers Technology (Flemish tapestry) + proximity to the Belgium 138,901 U.S. Pakistan Technology (Kashmiri carpets) + 122,060 + U.S. consumers’ desire for diversity Iran 116,308 Technology (world ­famous Persian rugs) Egypt 106,827 U.S. consumers’ desire for diversity Turkey 80,892 Technology (as a source of comparative advantage) Netherlands 52,568 Resources (know ­how from Belgium, land) United Kingdom Resources (wool) + Economies of scale (with origins (U.K.) 52,417 going back to the Industrial Revolution) To sum up, the U.S. imports carpets and other floor textile from countries specialized in the production of rugs either because of their technology (renowned since ancient times), or because of economies of scale (established since the Industrial Revolution and maintained because of the large demand for tapestry by Europe’s aristocracy), or because of proximity to the U.S. consumers. Lastly, remember that carpets and rugs are differentiated products, with intrinsic artistic value, so U.S. consumers’ love of product diversity also explains the diversity of import sources. Prof. Anca Cristea EC 481/581 Spring 2011 Prof. Anca Cristea EC 481/581 Spring 2011 Prof. Anca Cristea EC 481/581 Spring 2011 Prof. Anca Cristea EC 481/581 Spring 2011 Prof. Anca Cristea EC 481/581 Spring 2011 Part C: True/ False/ Uncertain For each question, answer T/F/U and briefly explain the answer (No points for an unsupported answer). 1. In the Ricardian model, two countries can benefit from trade if and only if both countries have absolute advantage in at least one good. False. A country will have a comparative advantage even if it doesn’t have absolute advantage in any sector. Differences in relative productivity lead to mutual opportunities for trade between countries. 2. Two countries can gain from trade with each other even if their relative prices in autarky are the same. False. If their autarky prices are the same, there is no arbitrage opportunity to take advantage of. Put another way, relative prices in autarky reflect relative productivities. If there are no differences in relative productivities, there are no gains from specialization. 3. In the real world, there is no support for the Ricardian model of trade: the prediction that wages are determined by labor productivities does not hold in the data. False. The evidence is pretty clear that countries that pay higher wages also have higher labor productivity. 4. In the Ricardian model, trade with a low wage country will increase aggregate unemployment levels. False. Specialization causes output and employment in one industry to expand and output and employment in another industry to contract. There is no net change in unemployment. 5. Wages in the US are $15/ hour while wages in Mexico are $3/hour. Goods manufactured using only labor will be 5 times cheaper in Mexico. False. The goods price depends on both productivity (number of workers needed to produce it) and the wage they are paid. The above statement would only be true if productivity were equal in the US and Mexico. But if productivity were equal, wage rates would not be 5 times higher in the US. ...
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