EC 481/581 Winter 2015 Problem Set 1 part A part B part C

EC 481/581Winter 2015Problem Set 1Due Date: Wednesday, January 14PART A (15 points): Net-workGo to the following website: http://strategis.ic.gc.ca/sc_mrkti/tdst/engdoc/tr_homep.htmlIt 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 2013 by the U.S. from the top ten tradingpartners in the product category: HS 8707 – Bodies for Motor Vehicles. To pick thisproduct, under the Product Options menu choose the Browse List of Productsoption and select the category 87- Motor Vehicles, Trailers, Bicycles, Motorcyclesand Other Similar Vehicles. Then hit the button View Products, and from all therecords retrieved, select the product category 8707 – Bodies for Motor Vehicles andclick Add to Selected Products. Once you have completed the query hit Run Report.List the top ten countries selling bodies of motor vehicles to the U.S. For eachcountry, state the reason(s) why you believe that country exports this product to theUnited States.PART B (55 points): Ricardian Model1. Assume that two countries – Home and Foreign – produce two goods: TVs andcars. Home has a total supply of labor hours of 100 and Foreign has a total supply oflabor hours of 200. Use the information below to answer the following questions:a. (5 points) What is the marginal product of labor for TVs and cars in the Homecountry? Graph the production possibility frontier for the Home country (put TVson the x-axis). What is the no-trade relative price of TVs at Home?b. (5 points) What is the marginal product of labor for TVs and cars in the Foreigncountry? Graph the production possibility frontier for the Foreign country (putTVs on the x-axis). What is the no-trade relative price of TVs in Foreign?c. (5 points) Which country has comparative advantage in the production of TVs?Which country has absolute advantage in the production of cars?d. (5 points) Suppose the world price of TVs in the trade equilibrium is PTV/PC = 1.Which good will each country export? Briefly explain.e. (5 points) In the trade equilibrium, what is the real wage in Home in terms of TVsand in terms of cars? How do these values compare with the real wage in terms ofeither good in the no-trade equilibrium?Prof. Anca CristeaEC 481/581Winter 2015f.(5 points) In the trade equilibrium, what is the real wage in Foreign in terms ofTVs and in terms of cars? How do these values compare with the real wage interms of either good in the no-trade equilibrium?g. (5 points) In the trade equilibrium, do Foreign workers earn more or less thanthose at Home, measured in terms of their ability to purchase goods? Explainwhy.2. For this exercise start from the data in the problem above. For each of thefollowing changes in productivity or resources: i). redraw Homes PPF and explainwhy the PPF changes in the manner it does; ii). Explain what happens to the no-traderelative price of TVs.a. (10 points) The number of workers decreases by half in the Homecountry.b. (10 points) There is technological progress in the TV industry such thatproductivity doubles in that industry. Nothing changes in the carindustry.PART C (30 point): True/ False/ UncertainFor each question, answer T/F/U and briefly explain the answer (No points for anunsupported answer).1. (6 points) In the Ricardian model, two countries can gain from trade with each other evenif their relative prices in autarky are the same.2. (6 points) In the case of U.S. textiles, the United States should not import textiles fromAsian nations since it has absolute advantage in production.3. (6 points) In the real world, there is no support for the Ricardian model of trade: theprediction that wages are determined by labor productivities does not hold in the data.4. (6 points) In the Ricardian model, trade with a low wage country will increase aggregateunemployment levels.5. (6 points) Wages in the US are $15/ hour while wages in China are $3/hour. Goodsmanufactured using only labor will be 5 times cheaper in China.