ECON231_Assignment1_F11_Sol_V1

ECON231_Assignment1_F11_Sol_V1 - ECON 231 Section 2...

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Page 1 of 10 Pages ECON 231 – Section 2 Introduction to International Economics Instructor: Sharif F. Khan Department of Economics University of Waterloo Fall 2011 Suggested Solutions to Assignment 1 (Optional) Part B Short Questions B1. Canada and Australia are (mainly) English-speaking countries with populations that are not too different in size (Canada’s is 60 percent larger). But Canadian trade is twice as large, relative to GDP, as Australia’s. Why should this be the case? We saw that not only is GDP important in explaining how much two countries trade, but also, distance is crucial. Given its remoteness, Australia faces relatively high costs of transporting imports and exports, thereby reducing the attractiveness of trade. Since Canada has a border with a large economy (the U.S.) and Australia is not near any other major economy, it makes sense that Canada would be more open and Australia more self- reliant. B2. Mexico and Brazil have very different trading patterns. Mexico trades mainly with the United States, Brazil trades about equally with the United States and with the European Union; Mexico does much more trade relative to its GDP. Explain these differences using the gravity model. Mexico is quite close to the U.S., but it is far from the European Union (EU). So it makes sense that it trades largely with the U.S. Brazil is far from both, so its trade is split between the two. Mexico trades more than Brazil in part because it is so close to a major economy (the U.S.) and in part because it is a member of a free trade agreement with a large economy (NAFTA). Brazil is farther away from any large economy and is in a free trade agreement with relatively small countries.
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Page 2 of 10 Pages B3. Over the past few decades, East Asian economies have increased their share of world GDP. Similarly, intra-East Asian trade – that is, trade among East Asian nations – has grown as a share of world trade. More than that, East Asian countries do an increasing share of their trade with each other. Explain why, using the gravity model. As the share of world GDP which belongs to East Asian economies grows, then in every trade relationship which involves an East Asian economy, the size of the East Asian economy has grown. This makes the trade relationships with East Asian countries larger over time. The logic is similar for why the countries trade more with one another. Previously, they were quite small economies, meaning that their markets were too small to import a substantial amount. As they became more wealthy and the consumption demands of their populace rose, they were each able to import more. Thus, while they previously had focused their exports to other rich nations, over time, they became part of the rich nation club and thus were targets for one another’s exports. Again, using the gravity model, when South Korea and Taiwan were both small, the product of their GDPs was quite small, meaning despite their proximity, there was little trade between
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This note was uploaded on 02/05/2012 for the course ECON 231 taught by Professor Rus during the Fall '08 term at Waterloo.

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ECON231_Assignment1_F11_Sol_V1 - ECON 231 Section 2...

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