Nguyễn Hà Phương – BABAWE16358

INTERNATIONAL ECONOMICS

ASSIGNMENT 1
CHAPTER 2

6.

Home Country Foreign Country Absolute Advantage

(Home/Foreign ratio)
Number of bicycle
4 2 2
produced per hour

Number of
snowboard produced 6 8 3/4
per hour

Comparative 𝑀𝑃𝐿𝑆 3 𝑀𝑃𝐿𝑆 ∗

= =4
advantage 𝑀𝑃𝐿𝐵 2 𝑀𝑃𝐿𝐵 ∗

a. See above table.

b. Home has an absolute advantage in the production of bicycles because it is able to
produce bicycles with fewer resources (more per hour) than Foreign.
c. Foreign has an absolute advantage in the production of snowboards because it is able to
produce snowboards with fewer resources (more per hour) than Home.
d. The opportunity cost of one bicycle is 3/2 snowboards at Home. The opportunity cost of
one bicycle is 8/2 snowboards in the foreign country.
e. Foreign has a lower opportunity cost in producing snowboards than Home. Therefore,
Foreign has a comparative advantage in the production of snowboards. Given Foreign’s
comparative advantage, Home has a comparative advantage in the production of
bicycles. Thus, Home will export bicycles and Foreign will export snowboards.
7.

In the no-trade equilibrium:

Home Country Foreign Country

𝑊𝑎𝑔𝑒𝑇𝑉 = 12 𝑊𝑎𝑔𝑒𝐶 =? ∗
𝑊𝑎𝑔𝑒𝑇𝑉 =? 𝑊𝑎𝑔𝑒𝐶∗ = 6

𝑀𝑃𝐿𝑇𝑉 = 2 𝑀𝑃𝐿𝐶 =? 𝑀𝑃𝐿∗𝑇𝑉 =? 𝑀𝑃𝐿∗𝐶 = 1

𝑃𝑇𝑉 =? 𝑃𝐶 = 4 ∗
𝑃𝑇𝑉 =3 𝑃𝐶∗ =?

𝑃𝑇𝑉 𝑀𝑃𝐿𝐶 3
a. 𝑀𝑃𝐿𝐶 = 3, 𝑀𝑃𝐿𝑇𝑉 = 2, 𝑎𝑛𝑑 = =
𝑃𝐶 𝑀𝑃𝐿𝑇𝑉 2
∗
𝑃𝑇𝑉 𝑀𝑃𝐿∗𝐶 1
b. 𝑀𝑃𝐿∗𝐶 = 1, 𝑀𝑃𝐿∗𝑇𝑉 = 2 𝑎𝑛𝑑 = 𝑀𝑃𝐿∗ = 2
𝑃𝐶∗ 𝑇𝑉
c. Home will export cars and Foreign will export televisions because Home has a
comparative advantage in cars whereas Foreign has a comparative advantage in
televisions.
d. Workers at Home are paid in terms of cars because Home exports cars. Home is better
off with trade because its real wage in terms of televisions has in-creased.
𝑀𝑃𝐿𝐶 = 3 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑐𝑎𝑟𝑠
𝑜𝑟
𝐻𝑜𝑚𝑒 𝑤𝑎𝑔𝑒𝑠 𝑤𝑖𝑡ℎ 𝑡𝑟𝑎𝑑𝑒 = { 𝑃
𝐶
× 𝑀𝑃𝐿𝐶 = (1) × 3 = 3 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑇𝑉
𝑃𝑇𝑉
𝑀𝑃𝐿𝐶 = 3 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑐𝑎𝑟𝑠
𝑜𝑟
𝐻𝑜𝑚𝑒 𝑤𝑎𝑔𝑒𝑠 𝑤𝑖𝑡ℎ𝑜𝑢𝑡 𝑡𝑟𝑎𝑑𝑒 = { 𝑃 2
𝐶
× 𝑀𝑃𝐿𝐶 = ( ) × 3 = 2 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑇𝑉
𝑃𝑇𝑉 3
e. Foreign workers are paid in terms of televisions because Foreign exports televisions.
Foreign gains in terms of cars with trade.
𝑃𝑇𝑉
× 𝑀𝑃𝐿∗𝑇𝑉 = (1) × 2 = 2 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑐𝑎𝑟𝑠
𝐹𝑜𝑟𝑖𝑒𝑔𝑛 𝑤𝑎𝑔𝑒𝑠 𝑤𝑖𝑡ℎ 𝑡𝑟𝑎𝑑𝑒 = { 𝑃𝐶
𝑜𝑟
𝑀𝑃𝐿∗𝑇𝑉 = 2 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑇𝑉
∗
𝑃𝑇𝑉 ∗
1
∗ × 𝑀𝑃𝐿 𝑇𝑉 = ( ) × 2 = 1 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑐𝑎𝑟𝑠
𝐹𝑜𝑟𝑖𝑒𝑔𝑛 𝑤𝑎𝑔𝑒𝑠 𝑤𝑖𝑡ℎ 𝑡𝑟𝑎𝑑𝑒 = { 𝑃𝐶 2
𝑜𝑟
∗
𝑀𝑃𝐿𝑇𝑉 = 2 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑇𝑉
f. Foreign workers earn less than workers at Home in terms of cars be-cause Home has an
absolute advantage in the production of cars. Home workers also earn more than
Foreign workers in terms of televisions.
 8. To engage in international trade, a country must have a minimal threshold of
productivity. Countries such as China have the productivity necessary to compete
successfully, but Haiti does not.

CHAPTER 4

3.

a. WLC/ RKC WLS/ RKS(and thus LC/ KC LS/ KS) implies that shoes are capital intensive.
This is certainly possible as shown in the New Balance application.

b. For computers:

For shoes

c. As seen in the percentage change calculation for the rental of capital in the shoe
industry, the magnitudes of the changes are equal (with opposite sign).
d. Because the increase in capital returns exceeds the price changes in both industries,
capital gains in real terms. Similarly, because there is a decrease in wage and the prices
of the outputs stayed the same or increased, labor loses in real terms. This is consistent
with the Stolper-Samuelson theorem: In the long run, when all factors are mobile, an
increase in the relative price of a good will cause the real earnings of labor and capital to
move in opposite directions, with a rise in the real earnings of the factor used
intensively in the industry whose relative price went up and a decrease in the real
earnings of the other factor.
5. With free trade the labor-abundant Foreign country will increase production of the labor-
intensive good (shoes), leading to a rightward shift of the relative demand curve from RD *1 to
∗
RD*2 . At the new equilibrium point B*, computers are weighted less, a fall in (𝐾𝐶∗ / 𝐾 ), whereas
∗
the shoe industry is weighted more, a rise in (𝐾𝑆∗ / 𝐾 ). As a result of the rise in the relative
demand for labor in the shoe industry, the relative wage increases, which in turn lowers the
labor/capital ratio in both industries.

6.

a. Russia is labor abundant because it imports the capital-intensive good.

b. Russia will specialize in the labor-intensive product, which will lead to an increase the
relative demand for labor in the labor-intensive industry. This causes an increase in the
relative wage. The higher relative wage cuts the number of workers hired per unit of
capital in the labor intensive industry, thereby reducing the labor/capital ratio. By the
law of diminishing returns, the decrease in the labor/capital ratio leads to a rise in the
marginal produce of labor in both industries. Thus, the real wage will increase in Russia
following trade.

c. The real rental on capital will decrease because the world relative price of automobiles
is lower than Russia’s no-trade relative price. More specifically, with a lower
labor/capital ratio in both industries, the marginal product of capital decreases so that
the real rental on capital falls.

d. The capital owners will support policies to limit free trade because they suffer a loss due
to the decrease in the relative price of automobiles when Russia engages in trade.
 CHAPTER 7

10. Tire manufactures operating in the United States did not support the tariff because many of
them already manufacture tires in China. Of the ten manufactures operating in the United
States, seven also produce tires in China, so a tariff on tires imported from China would make it
more costly for them to produce in China.

11.

a. Total surplus in the absence of trade is 35.

Consumer surplus without tariff: Producer surplus without tariff:
1 1
𝐶𝑆 = × 5 × (18 − 9) = 22.5 𝑃𝑆 = × 5 × (9 − 4) = 12/5
2 2

b. Home is better off with trade because total surplus increases by 15 (i.e., total surplus
under trade is 50).
Consumer surplus under free trade: Producer surplus under free trade
1 1
𝐶𝑆 = × 8 × (18 − 6) = 48 𝑃𝑆 = × 2 × (6 − 4) = 2
2 2

c. The net effect on Home welfare is -8

Consumer surplus with tariff: Producer surplus with tariff:
1 1
𝐶𝑆 = × 6 × (18 − 8) = 30 𝑃𝑆 = × 4 × (8 − 4) = 8
2 2
Government with tariff:
 Government = (6-4) x (8-6) = 4
Fall in consumer surplus: -18
Rise in producer surplus: +6
Rise in government revenue:+4
Net effect on Home welfare: -8

13.
a. Refer to the following figure: For the small-country tariff case, tariff revenue equals the
tariff per import multiplied by the amount of imports. In panel (b), this is represented by
the rectangle a+b. With TRQ, only M’M2 imports are subject to the tariff. Therefore the
government collects
t*M’M2=b. Because the new domestic price is P*+t, someone has the ability to buy (or
produce) abroad for P* and sell domestically for P* +t. This differential is called quota
rents and can be represented by the amount of the quota multiplied by the difference
between domestic and world price: t x M’ = a

(hình)

b. If the quota rents stay at Home and are not squandered by rent seekers (that is, they are
collected by the government through auction or given to Home firms), then Home’s
welfare is the same as under a tariff. However, if quota rents are given to the foreign
country, then Home’s welfare is less than un-der a tariff. By analogous reasoning, if
quota rents stay at Home, then Foreign’s welfare is unchanged, whereas if quota rents
are sent abroad, then Foreign’s welfare is higher.
c. Given that the Foreign country’s welfare decreases with the addition of a tariff on its
exports to Home (i.e., it sells fewer goods to Home at the same price or less than
before), Home can make the situation more politically palatable to Foreign by
implementing a TRQ and giving away the quota rents to foreign firms.