Question 1. Assume a two-country trading world that consists of Colum

04 Jun Question 1. Assume a two-country trading world that consists of Colum

Question
1. Assume a two-country trading world that consists of Columbia and Ecuador, both of which produce coffee and oil. Suppose labour is the only factor of production, and the relative cost of producing one product in terms of another product is constant in both nations. The available supply of labour in Columbia and Ecuador is 4,800 and 3,200, respectively. The following table shows the unit labour requirements in coffee production and oil production in both countries.

Per-unit labour

requirement for producing

Oil Coffee

Ecuador 12 8

Columbia 20 4

a) Draw the production possibility frontier for each of these countries.

b) Calculate their autarky relative prices of Oil for each country.

c) Which country has an absolute advantage in Oil? Which in Coffee? Which has a comparative advantage in Oil? Which in Coffee?

d) What are the autarky wages of workers in Ecuador, in units of Oil per unit of labour? In units of Coffee per unit of labour? What are the autarky wages of workers in Columbia, also in units of Oil and in units of Coffee? Can you tell which country’s workers are better off in autarky?

e) Assuming free trade, in what commodity should each nation specialise?

f) What is each country’s gains from trading at a price ratio, POil/PCoffee = 1.0.

2. (a) According to the following table, which country is relatively more labour-abundant? Explain your answer. Which country is relatively more capital-abundant?

United States Canada

Captal 40 machines 10 machines

Labour 200 workers 60 workers

(b) Suppose that the United States and Canada have the factor endowments in the preceding table. Production technology in both countires refelects charecteristics of necoclasical production functions. Suppose further that the production requirements for a unit of steel are 2 machines and 8 workers, and the requirement for a unit of bread is 1 machine and 8 workers.

i. Which good, bread or steel, is relatively capital-intensive? Labour intensive? Explain your answer.

ii. Which country would export bread? Why?

(c) Suppose that before trade takes place, the United States is at a point on its PPC where it produces 20 loaves of bread and 20 units of steel. Once trade becomes possible, the price of a unit of steel is 2 units of bread. In response, the Unites States moves along its PPC to a new point where it produces 30 units of steel and 10 units of bread.

(d) Given the information in parts (a) and (b), explain what happens to the returns to capital and labour after trade begins.

Hint: Use the Heckscher-Ohlin theorem.

3. When Spain and Portugal joined the Europian Community (EC) in 1986, The United States feared that a result of this change might be a shift in demand for agricultural products by Spain and Portugal away from the United Sates and toward other EC community members. In response, the United States threatened to impose stiff tariffs on a variety of exports of the rest of the EC to the United States. Using offer curve diagrams for (a) the United States and Spain/Portugal, (b) Spain/Portugal and the rest of the EC, and (c) the United States and the rest of the EC, illustrate and explain the effects of these potential events on the terms of trade and volume of trade for the various economics units.

4. The following information is relevant to an import-competing steel industry.

· ?Iron ore and coal are the only intermediate inputs in steel production, and both are either imported or are produced domestically in competition with imports;

· ?Production of 1 tonne of steel requires 4 tonnes of iron ore and 6 tonnes of coal;

· ?The free trade price of steel is $600 per tonne, the free trade price of coal is $40 per tone;

· ?The country imposes a 30 per cent ad valorem tariff on imports of steel, while iron ore and coal imports face ad valorem tariffs of 30 per cent and 15 per cent respectively.

(a) Calculate the effective rate of protection (ERP) for the steel industry.

(b) What happens to the ERP for the steel industry if the tariff on iron ore is increased to 40 per cent and on coal is reduced to 10 per cent?

(c) What happens to the ERP if the tariffs on iron ore and coal are both abolished but country increases tariff on steel imports to 50 per cent?

5. Suppose that Australia is a small country in the global heavyweight motorcycle market. Consider the following about the approximate impact of Australian tariff imposed in the 1908s in the heavyweight motorcycle market (quantities are in 1000s):

Free trade $600 tariff

Australian price $3400 $4000

Quantity consumed 200 150

Quantity produced 100 125

a. Contrast the free trade and tariff situation in a domestic market supply and demand diagram.

b. Use information from the diagram to compute the value of the following effects of the tariff, and indicate where each one shows up in your diagram: (1) Change in consumer surplus; (2) Change in producer surplus; (3) Tariff revenue; and (4) Welfare cost of the tariff. (Important: your answers should be in millions of dollars).

c. An economic study estimated that the tariff created 700 jobs in the domestic motocycle industry. How much did each of these jobs “cost” Australian consumers? How much did each one cost the economy as a whole?

d. Suppose that the government had instituted a quota policy instead. What is the quantity of import licenses that the government would issue to achieve the same price and quantity effects as the tariff?

6. Country A is a small country considering joining a free trade area for trade in X. The cost of importing a unit of good X from countries that would not be members of the potential group is $10 per unit. The cost of importing a unit of good X from countries that would be members of the potential group is $20 per unit. Currently, country A applies a $5 per unit tariff on imports of good X from all sources. If the free trade group forms, will there be any trade creation? Any trade diversion? Why?

7. Suppose that:

· Australia trades with only seven countries – Japan, the USA, the UK, New Zealand, Singapore, China and Hong Kong.

· Australia’s exports and imports data (2012) relating to these six trading partners are given bellow:

Country

Exports (A$million)

Imports (A$million)

Japan

51,171

20,300

US

9,854

30,317

UK

8,009

6,918

NZ

7,668

7,511

SG

6,558

14,872

China

Hong Kong

76,824

2,839

43,405

1,132

· the nominal exchange rate between the Australian Dollar and currencies of Japan, the USA, UK, New Zealand, Singapore, China and Hong Kong in 2009 (May) and 2013 (May) were:

Country

Exchange Rate

2009 (May)

2011 (May)

Japan

¥ 63.81 = $A1

¥ 100.90 = $A1

USA

$US 0.6433 = $A1

$US 1.0367= $A1

UK

£ 0.4545 = $A1

£ 0.6668 = $A1

NZ

SG

China

Hong Kong

$NZ 1.2812 = $A1

$SG 0.9985 = $A1

Renminbi 4.3963= $A1

$4.9916 = $A1

$NZ 1.2084 = $A1

$SG 1.2766 = $A1

Renminbi 6.3913= $A1

$8.0450 = $A1

(i) Calculate the percentage rate of depreciation or appreciation of the Australian dollar against all seven currencies. Comment on your results.

(ii) Calculate and show the trade weights that you will use in the effective exchange rate (EER) estimation.

(iii) Calculate the trade-weighted effective exchange rate (EER) index for Australia in 2013. What is the rate of appreciation or depreciation of the Australian dollar in effective terms? Compare this result with that obtained in (i) above.

8. Suppose that the consumer price index numbers for Japan, the USA, the UK, NZ, Singapore, China, Hong Kong and Australia in 2009 and 2013 were:

Country

Consumer Price Index

2009

2013

Japan

100

98.9

USA

100

109.1

UK

100

114.5

New Zealand

Singapore

China

Hong Kong

100

100

100

100

109.2

114.6

101.0

114.5

Australia

100

110.7

(i) Calculate the real bilateral exchange rates.

(ii) Calculate the rate of change in the real bilateral exchange rates.

(iii) Use this information and the data supplied in question 7 to calculate a real effective exchange rate (REER) index for 2013.

(iv) What, if anything, do your results suggest about the change in Australia’s international competitiveness over this period? How does the change affect Australia’s trade?