Retake Exam International Trade

Transcription

1 Prof. Dr. Oliver Landmann Retake Exam International Trade Aril 20, 2011 Question 1 (30%) a) On what grounds does the Krugman/Obstfeld textbook object to the following statement: Free trade is beneficial only if your country is strong enough to stand u to foreign cometition. Discuss. b) What do the offer curves of the standard trade model exress, and what exlains their eculiar curvature? c) What is a Rybczynski line? What is its sloe and what exlains that sloe? Question 2 (30%) a) In the diagram below, what are the variables on the two axes, and what is exressed by the A(z) schedule? Why does this schedule sloe down? b) What is exressed by the B(z;L*/L) schedule? Why is this schedule uward sloing? c) How does the equilibrium of this model change if labor roductivity, while unchanged in the home economy, increases by 10% for all goods in the foreign economy? What is imlied for the real income of the home economy?

2 Prof. Dr. Oliver Landmann 2 Question 3 (15%) A small oen economy is engaged in international trade. Perfect cometition revails and world market rices ( x, y ) are exogenous. The country roduces two goods (,) α 1 α according to the following Cobb-Douglas roduction functions: = K L and β 1 β = K L (0 < β < α < 1). The economy is endowed with both exogenous caital K = K + K and exogenous labor L = L + L. Caital and labor are comletely mobile between sectors. a) Show how the caital-intensity of each sector deends on the factor rice ratio. b) Answer the following question, without exlicitly calculation the factor rice ratio: How do x and y influence the factor rice ratio? Question 4 (25%) Consider Paul Krugman s model of incomlete cometition and intra-industry trade. a) Does the model assume internal or external returns to scale? Exlain. b) What are the endogenous variables of the model and how are they influenced ba) by the size of the market? bb) by the size of fixed costs on the firm level? (A formal derivation of the model is not required. Intuitive and/or grahical arguments will suffice.)

3 Prof. Dr. Oliver Landmann 3 International Trade: Re-Exam Outline of solutions Question 1 a) Krugman/Obstfeld object to the statement on the grounds that it attributes gains from free trade to absolute advantages between countries. et the relevant concet for gains from trade is comarative advantage. The argument in detail is given in Ch. 2 of the book (English version, 5 th ed.,. 23; German version, 6 ed.,. 54). b) Given relative rices, suly and demand can be determined for each good of a country. This in turn determines excess demand (imort demand) and excess suly of each good (exort suly). Offer curves deict these atterns for varying relative rices. As the terms of trade of country A imrove, the exort suly as well as the imort demand will increase, as long as the income effect is not strong enough to reduce exort suly. In this case imort demand may still increase with increasing terms of trade, while exort suly contracts. IM A E B D A OC A E A IM A D OC B E D B E A IM A E E A IM B [Offer curves for countries A and B; Equilibrium oint E]

4 Prof. Dr. Oliver Landmann 4 c) The Rybczynski line indicates the shift of the roduction oints of a 2x2-economy as one factor of roduction increases. The shift of the roduction ossibility frontier favors the sector that uses the exanding factor of roduction more intensively. At an unchanged relative rice, this sector will exand whereas the cometing sector will contract. A B Rybczynski line ( K K ) Δ Δ = Δ [With caital exanding; Sector using caital more intensively than sector ] Question 2 a) ω : Wage differential between home and foreign w/w * z : Continuum of goods in the interval [0,1]; z indicates the threshold between goods roduced in the home country and the goods roduced in the foreign country. = between home and foreign in the ro- reflects the alignment of the goods along the z axis according to their relative roductivity. * A(z) : Productivity differential A( z) a ( z) a( z) duction of good z. A' ( z) < 0

5 Prof. Dr. Oliver Landmann 5 b) B( z; L * / L) : Equilibrium condition; sum of home and foreign exenditures on home roduced goods must equal the suly of home goods. The schedule is uward sloing because an increase in the range of goods roduced in the home country increases demand for labor in home country, thus - for labor market clearance - inducing an increase in ω. Alternatively, B( ) can be interreted as an equilibrium condition for the trade balances between home and foreign. c) An increase of foreign roductivity imlies falling a * ( z) for all goods [0,1]. At any given wage differential, the foreign county will have a comarative advantage in more goods than before. The A(z) schedule moves inwards, giving us a new equilibrium with a lower z and a lower wage differential. The real income of the home economy goes u due to cheaer imorts. ω B ( ) ω E ' ω A ( z) A ' ( z) ' z z z

6 Prof. Dr. Oliver Landmann 6 Question 3 a) Under erfect cometition, factor rices must be equal to marginal roducts in each industry: w MPL w = ; MPL r w = ; = MPK ; = MPK x x β 1 β α 1 α With the roduction functions secified as = K L and = K L, the factor rice ratios w/r in each industry are given by: w r w r L β β ( 1 β ) K L ( 1 β ) = = β 1 1 β K β K L L = β α α ( 1 α ) K L ( 1 α ) = = α 1 1 α K α K L = α b) In a Heckscher-Ohlin model the factor rice ratio is directly linked to the goods rice ratio, which in the case of a small oen economy is exogenous. The factor used more intensively in an industry benefiting from a rice increase will rofit from this increase. Since is the caital intensive good (α > β), an increase in / translates into a decrease of the factor rice ratio w/r. The change in the factor rice ratio will be bigger than the initial change in the rice ratio (magnification effect). k k Question 4 a) The labor requirement li = α + β xi indicates internal returns to scale. In the case of external economies of scale, firm-level costs deend on the size of the industry. b) The most imortant endogenous variable of the model are: n : number of firms x i : outut of each individual firm ba) To illustrate the effect of the size of the market on the endogenous variables consider an increase in the labor force L: As the size of the market increases, total sales increase. Production of each firm will increase. This will reduce average costs of every firm. As average cost decreases, rofits will be earned and more firms will enter the market, until rice equals average cost again and rofits are wied out. In the end both n and x will be higher than in the initial equilibrium. bb) To illustrate the effect of fix costs on the endogenous variables consider an increase the fixed labor requirement α : An increase in fixed costs will increase average cost. This will drive firms out of the market and force the remaining firms to roduce more so as to avoid losses. The bottom line is that n falls and x rises.