Econ 370, International Trade, Homework 1*****Already A++ Rated Tutorial Use As Guide Paper*****

03 Jul Econ 370, International Trade, Homework 1*****Already A++ Rated Tutorial Use As Guide Paper*****

Question 1. This question helps you review the Ricardian model. 22 points, 2 each.

 

MPL                MPL                Labor units

Cloth               Widgets

Home              1/100               1/200                           600

Foreign            1/60                 1/30                             120

 

Answer the following questions and show your steps. For the T/F questions, please explain why they are T/F.

 

 

(1). T/F? The Foreign country has the absolute advantage for both cloth and widgets.

 

 

(2). Draw the PPF for the Home country. Please label the max cloth output and max widget output.

 

(3). T/F? The Home country has the comparative advantage for widgets.

 

(4) T/F? In the Foreign country, under closed-economy equilibrium, 1 cloth fetches the same price as 2 widgets.

 

(5) Calculate the real wage for widgets in the Home country under closed economy equilibrium.

 

(6). If these two countries trade, then what is the lower limit of the relative price of cloth  in the free-trade equilibrium (i.e. P_cloth^T/P_widget^T)?

 

 

For the questions below, assume that P_cloth^T/P_widget^T = 1.

 

(7). In your PPF picture in (2) above, illustrate that the Home country gains from trade. You may also draw a new picture below if you wish. Please label the slope of the CPF.

 

 

(8). Calculate the real wage for widgets in the Home country under the free-trade equilibrium.

 

(9) Calculate the wage of the Home country relative to the wage of the Foreign country under free trade.

 

 

(10) According to your answer to (9), which country has a higher wage under free trade? What is the intuition for this?

 

(11) T/F? Because the Home country gains from trade, the real wage for cloth under free trade is higher than under closed economy.

 

 

Question 2. This question helps you get a deeper understanding of the wage equation. (6 points, 3 points each).

 

(1) According to our wage equation, w = P x MPL. We also know that in competitive markets, price equals marginal cost. What is the expression for marginal cost, according to the wage equation?

 

 

(2) Explain, in plain English, why the expression you derive above is marginal cost.

 

 

Question 3. Short Essay. This question gives you a chance to apply what we have learned and discussed, and helps sharpen your writing skills. 20 points.

 

Ever since the signing of NAFTA, the U.S. has run a sizeable trade deficit with Mexico. This shows that free trade with Mexico, under NAFTA, is detrimental to the U.S.; i.e. it is a bad deal. Comment.

 

Please finish your essay using MS word and print it out. 12 points, Times News Roman, double spacing. There is no min. requirement or cap for length. You are not expected to use data to support your arguments, but the use of data is a plus. If you choose to use data please list your data sources. (Hints: 1. Make sure the sources are credible before you use the data; 2. Examples with made-up numbers, like those we use in the Ricardian model, are theory, not data.)

 

Your essay grades are based on clarity of exposition, coherence of arguments, and how well your theory (and data, if you use any) supports your arguments.

 

Please give credits to your sources and explicitly cite them. Otherwise you run the risk of plagiarism!

 

The following is a very nice example of supporting your argument with data, and references, by L. Newsom, for Econ 370, Spring 2016.

 

“…In the claim Sanders says that the loss of [manufacturing] jobs is due to the low wages other people are willing to accept. If that was true then the wages in the manufacturing sector in the United States would be decreasing to try to compete. The data is quite the opposite since the average manufacturing worker earned $79,553 annually in 2014 including benefits which is much higher than the average in the United States (2).

…

 

[2] National Association of Manufacturers. (2016). Top 20 Facts About Manufacturing. [Online] Available: