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QUESTIONS

Q 1) The evidence suggests that as international productivities converge, so do


international wage levels. Why do you suppose this happened for the East Asian
NICs? In light of your answer, what do you think is likely to happen to the relative
wages (relative to those in the United States) of China in the coming decade?
Explain your reasoning using figures (Hint: Following the logic of the Ricardian
model of comparative advantage)

Answer: Following the logic of the Ricardian model of comparative advantage, the East
Asian countries played to their respective comparative advantages. This allowed the
world demand to provide excess demands for their relatively abundant labor, which in
turn tended to raise these wages. If China follows the same pattern, their wages levels
should also be expected over time to converge to those in their industrialized country
markets.

Q 2) Many countries in sub-Saharan Africa have very low labor productivities in


many sectors, for example in manufacturing and agriculture. They often despair
of even trying to attempt to build their industries unless it is done in an autarkic
context, behind protectionist walls because they do not believe they can compete
with more productive industries abroad. Discuss this issue in the context of the
Ricardian model of comparative advantage with figures (Hint: Following the logic
of the Ricardian model of comparative advantage).

Answer: The Ricardian model of comparative advantage argues that every country must
have a comparative advantage in some product (assuming there are more products than
countries). However, the Ricardian model is not a growth model, and cannot be used to
identify growth nodes or linkages.

Q 3) In the past half century, the developing countries have experienced major
compositional shifts from exports of primary products (including agricultural and
raw materials) to exports of manufactures. How might you explain this in terms of
broad historical developments during this period? (Hint: the export experience of
the developing countries)

Answer: Any discussion of the export experience of the developing countries must
first clarify the problem of definitional inclusion. In particular, the exports of the
(non-OECD) developing countries, has become increasingly dominated by the
experience of a relatively small number of countries in South-East Asia, termed the
New Industrialized Countries (NICs). Since they experienced both very rapid
increases in their exports, and very rapid increases in the manufactured component of
their exports, their experience alone may explain the bulk of the observed
phenomenon. Many would exclude the NICs from the developing country category so
as to be able to focus the discussion on a more representative sample of (the over 100)
developing countries. More recently, a second wave of East Asian countries, notably
including China have replicated the experience of the NICs, and this again muddies

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the water for one interested in focusing on the export experience of the increasingly
heterogeneous category, developing countries. Another explanation of the growing
dependence on manufactured exports on the part of the developing countries is the
following: Since the consumer (including industrial consumer) markets in OECD
countries were rapidly shifting away from primary products, these markets were
rapidly disappearing.

In addition, the world market for primary products was generally limited by low price
and especially income elasticities; agricultural sectors tended to be highly and rigidly
protected in potential OECD markets; and escalating effective tariff structures levied
systematically large levels of protection against the primary exports of the developing
countries; export success had to be pursued outside of the traditional primary exports
of these countries.

Q 4) One of the major political developments of the past several decades is the
growing size and economic/monetary integration of the European Union. What
effect do you think this will have on international trade between countries? (Hint:
The growing economic integration between the various countries of Europe)

Answer: The growing economic integration between the various countries of Europe,
both the old and existing members of the European Union (EU) and the new countries
joining it (including perhaps soon, Turkey), means that the barriers to trade are
steadily falling in a region that has traditionally dominated world trade. The common
monetary unit should in itself go far to promote inter-country trade within the growing
EU (judging by the positive historical effect of a single currency in the U.S.). The
standardization of transportation (including railroad gauges, highway signs etc.) and
product codes will also promote expansion of intra-EU trade. The decline in the
probability of political conflict associated with this comprehensive economic union,
plus conscious attempts to cooperate in fiscal and monetary policy stances again point
to growing international trade, allowing these countries to increasingly enjoy the
fruits of potential positive scale economies, and more traditional classical and neo-
classical gains from trade. The scale economies will also tend to increase trade
between the EU and other countries.

Q 5 ) It is argued that a tariff may help promote employment in a single industry,


but is not likely to help employment in general. Discuss. (Hint: A general tariff on
all imports)

Answer: A general tariff on all imports is equivalent to a depreciation in the value of the
countryʹs currency. It would raise the prices of all imports, and have a considerable income
effect. This income effect will have a negative effect on total consumption of the import-
competing sector (as well as the exportables and non-tradables). In addition, under conditions
of a flexible exchange rate regime (assuming the Marshal-Lerner Conditions hold) it will lower
the supply of the countryʹs currency in the foreign exchange market, and hence cause an
appreciation of the currency. This will harm the countryʹs exports, and negatively affect this
sectorʹs employment.

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Q 6) When comparing the composition of world trade in the early 20th century to
the early 21st century, we find major compositional changes. These include a
relative decline in trade in agricultural and primary-products (including raw
materials). How would you explain this in terms of broad historical developments
during this period? (Hint: The typical composition of world production)

Answer: The typical composition of world production during this period experienced
major changes. Focusing on today's Industrialized Countries (primarily members of the
OECD), the industrial-employment composition was focused primarily on agriculture.
Most value was in land. The predominant single consumption category was food. Since
then, the economies shifted from the agricultural to the manufacturing sectors
(continuing trends begun over a century earlier in the industrial revolution). Incomes
rose, and consumption shifted in favor of (increasingly affordable) manufactures. Both
income and price elasticities were greater in manufactures than in agricultural products.
At the same time there was a steady tendency for synthetic (manufactured) inputs to
replace agricultural base draw materials and industrial inputs. Hence, trade and of
course international trade conformed to overall changes in patterns of world production
and consumption.
Q 7)

Refer to the graph above. Suppose, as a result of various dynamic factors


associated with exposure to international competition, Albania's economy grew,
and is now represented by the rightmost production possibility frontier in the
figure above. If its point of production with trade was point c, would you consider
this growth to be export-biased or import biased? If Albania were a large country
with respect to the world trade of A and B, how would this growth affect Albania's
terms of trade and ıts real income? (Hint: The terms of trade)

Answer a) If point c is the production point with trade, then Albania has a comparative
advantage in good B. Therefore, from the shape of the new production possibility
frontier (as compared to the original one), this is clearly an export-biased growth. b)
This ceteris paribus would tend to worsen Albania's terms of trade. The terms of trade
effect would, again ceteris paribus, worsen its real income. However, the growth itself
acts in the opposite direction.

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Q 8)

Refer to the graph above. Points A, B, and C represent ________, ________, and ________,
respectively (BRIEFLY EXPLAIN YOUR ANSWER) (Hint: equilibrium wage rate after
migration)
A) equilibrium wage rate after migration from home to foreign has
occurred; the wage rate in foreign before migration; the wage rate in
home before migration
B) equilibrium wage rate after migration from foreign to home has
occurred; the wage rate in home before migration; the wage rate in
foreign before migration
C) the wage rate in home before migration; the wage rate in home after
migration; the wage rate in foreign after migration
D) the global wage rate before migration; the wage rate in foreign after
migration; the wage rate in home after migration
E) the global wage rate before migration; the wage rate in home after
migration; the wage rate in foreign after migration

Q 9)

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Refer to the figure above, which shows a country's possible production possibility
frontiers and indifference curves. If the country is producing at ________, then
moving to ________ will cause utility to ________ (BRIEFLY EXPLAIN YOUR ANSWER)
(Hint: country's possible production possibility frontiers)
A) point b; point c; remain unchanged
B) point a; point b; increase
C) point c; point b; increase
D) point c; point b; decrease
E) point a; point c; remain unchanged

Q 10) Countries do not in fact export the goods the H.O. theory predicts. Is this
statement true or false? Discuss your answer using real life country examples with
diagrams (Hint: H.O. theory and the Leontief Paradox).

Answer: This statement is not true. Although one may find many cases where it seems
to be true (e.g., the Leontief Paradox), all one needs to do in order to render the above
statement not (generally) true is to find one counter example. In fact, one can find
large subsets of agricultural and commodity products in which the H.O predictions are
generally fulfilled. Labor-intensive countries such as Bangladesh do in fact export
relatively labor-intensive goods. Capital-intensive countries such as Germany do in
fact export capital-intensive products (at least to South countries). Countries such as
Costa Rica ("sunshine abundant") tend to export bananas (sunshine-intensive
products). The U.S. (a wheat-land-abundant country) does indeed export wheat (a
wheat-land intensive product). In fact, since the early 1980s, the Leontief Paradox
was not found to describe the U.S. trade data (hence ratifying the H.O. theory).