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CECN 707 - Economics of International Trade

(Online Course)

ASSIGNMENT 1

(Covers Week 1-4)

Due Friday, May 26^th at 11:59pm (Toronto time)

Submission Instructions:

1. Submit the answers to all problems in ONE file, in either docx OR pdf format.  Answer all questions in order and clearly state the part of the question that you are answering.

2. If more than one assignment file is submitted, only one randomly selected file will be graded.

3. You will need to submit two additional excel files containing the data used in problems 1 and 2.  Please, follow the instructions indicated in the problems.

4. You must submit your files on the Assignments section of D2L only.  Do not forward it to your instructor. All email attachment forms or hardcopy forms of submissions will NOT be accepted.  

5. The due date of the assignment is Friday, May 26^th at 11:59pm (Toronto time).

6. This assignment is worth 15% of your final grade.

Problem 1. (Evolution of world trade) [week 1]. This problem asks you to investigate the importance

 of international trade in the economy of a country of your choice, by plotting the country’s evolution of its exports and imports over a period of up to 50 years.

To understand whether trade has become more or less important over time for a given country, we focus on the value of exports and imports over time as a percentage of GDP. As countries develop, their economies grow and, therefore, they probably import and export more.  Because of this, to determine whether trade becomes more important over time, we need to normalize by the size of the economy (the country’s GDP).

Obtaining the data

The World Development Indicators Databank (https://databank.worldbank.org/source/world-development-indicators) provides time series economic data for a large set of countries.  You will need to create a free account to be able to download data.

Choose a country to study, OTHER THAN THE USA.  You will use this country in problems 1 and 2.

On the website above, you will find a set of queries to extract the required data from the database. Follow these steps:

· On the left menu, click on “Country” and select the country of your choice.

· Click on “Series” and choose “Exports of goods and services (% of GDP)” AND “Imports of goods and services (% of GDP)

· Click on “Time” and select the option 50 on “VIEW RECENT YEARS”

· Click “Apply Changes” on the box that appears to the right of the queries’ menu.  A table with your data will appear.  If the table is empty that means that there are no available data for the country you chose.  If this is the case, please, choose a different country by updating the “Country” choice in the menu)

· Click on “Download options” tab (upper right corner) and choose Excel

Analyzing the data

a) In your excel file, create a line graph (on a new sheet) that shows the exports and imports series in the same graph (you will need to submit this excel file as part of your assignment—name it “data_problem1.xlsx”)

b) Copy your graph in your assignment document and write a brief report (not longer than half a page at 1.5 spaces) explaining what you observe in the graphs.  Make sure that you address: (i) how the graphs change over time; (ii) whether the country runs trade surpluses (it exports than it imports) or trade deficits (it imports more than it exports) and whether the deficits/surpluses changes over time, (iii) any sharp changes in the indicators (can you figure out what happened during those periods?)

Problem 2. (Description of a country’s trade) [week 1] This problem asks you to dig a little deeper into the pattern of trade of your chosen country.  In particular, you will investigate the country’s main trading partners and the main products that the country imports and exports. The World Integrated Trade Solution (WITS) (https://wits.worldbank.org/WITS/WITS/Restricted/Login.aspx ) reports bilateral trade data by product for a large number of countries and their trading partners. You will need to create a free account to download data.

Obtaining the data

1. Main trade partners: These instructions explain how to obtain an excel table with the value of your selected country’s bilateral imports AND exports with all the countries in the world.  You need to extract two tables: one for imports and one for exports.

In the link above, under “Quick Search”, choose “UN COMTRADE by product”. Enter the following options in the queries that appear:

1) Nomenclature (this indicates the goods’ classification that you will be considering—you will choose the most recent version of the Harmonized System Classification). Enter “HS 2017”

2) Year (this is the year of study): 2019.

3) Flow (this is the variable that you want to report): Gross Imports / Gross Exports

4) Tier (this is the level of disaggregation at which you want your data): Chapter (all 2-digit HS codes).

5) Product (this helps you select a product.)  We want the total value of trade, so you should choose: “Total All Products”.

6) Reporters (this is the country that is importing/exporting—your selected country): highlight your selected country and use the arrow to have it appear under “selected countries”.

7) Partners (these are the partner countries): click on the double arrow to select ALL countries.

8) Click “view report” and “Proceed” to view a table with your data.  This table will contain the total value of imports/exports between your selected country and all other countries in the sample.

9) Once you get the table, you can download it by clicking on “Download”.  Choose a “Job name” and a “Job description” and choose “Excel” as a File Format, and click “Download” again.  

10) You will be brought to a screen that contains all your “jobs”.  Just click on the icon under “Save” to obtain your table.

2. Main traded products: This instructions explain how to obtain excel tables with the value of your selected country’s imports AND exports, by sector, to the whole world.  You need to extract two tables: one for imports and one for exports.

Under “Quick Search”, choose “UN COMTRADE by country period”. Enter the following options in the queries that appear:

1) Nomenclature (this indicates the goods’ classification that you will be considering—you will choose the most recent version of the Harmonized System Classification). Enter “HS 2017”

2) Tier (this is the level of desaggregation at which you want your data): Chapter (all 2-digit HS codes)

3) Reporters (this is the country that is importing/exporting—your selected country): choose your selected country from the list

4) Year (this is the year of study): 2019

5) Flow (this is the variable that you want to report): Gross Imports / Gross Exports

6) Partner (these are the partner countries): select “World—WLD” from the list

7) Click “view report”

8) In the Select Report Columns option, add “Product description” to the Selected columns by highlighting it and clicking on the arrow.  Select “Proceed” to view a table with your data.  The table will contain your selected country’s total value of imports/exports to the world of a list of 97 products (all products included in the HS classification at the 2-digit level)

9) Once you get the table, you can download it by clicking on “Download”.  Choose a “job name” and a “job description” and choose “Excel” as a File Format, and click “Download” again.  

10) You will be brought to a screen that contains all your “jobs”.  Just click on the icon under “Save” to obtain your table.

Put all FOUR tables in an excel file called “data_problem2.xlsx”.  You will need to submit this file with your assignment.

Analysis of the data

Main trading partners

a) Use the downloaded data to determine the share of your country’s total imports that comes from each of the other countries.  Construct a table with the TOP 10 main exporters to your country of interest (as rows) and the share of total imports that each accounts for (in a column). Use Excel to plot it in a graph (pie or column graph.)

b) Use the downloaded data to determine the share of your country’s total exports that goes to each of the other countries.  Construct a table with the TOP 10 main importers of goods from your country of interest (as rows) and the share of total exports that go to each country (in a column). Use Excel to plot it in a graph (pie or column graph.)

c) Copy your graphs in your assignment document and write a brief report (not longer than half a page at 1.5 spaces) explaining what you observe in the graphs.  Make sure that you address: (i) whether the main exporters and importers are the same or different countries; (ii) how your findings relate to the predictions of the gravity model described in the module and in chapter 2 of your book (comment on the size and distance of the top trade partners); (iii) the concentration of your country’s trade (is your country trading mainly with one or two countries?)

Main traded products

d) Use the downloaded data to determine the share of your country’s total imports accounted by each product.  Construct a table with the TOP 10 main products imported by your country of interest (as rows) and the share of total imports that each accounts for (in a column). Use Excel to plot it in a graph (column or pie chart.)

e) Use the downloaded data to determine the share of your country’s total exports accounted by each product.  Construct a table with the TOP 10 main products exported by your country of interest (as rows) and the share of total exports that go to each country (in a column). Use Excel to plot it in a graph (column or pie chart.)

f) Copy your graphs in a word document and write a brief report (not longer than half a page at 1.5 spaces) explaining what you observe in the graphs.  Make sure that you address: (i) whether the country’s top imports and exports are similar products; (ii) the concentration of your country’s trade (does your country mainly imports/exports one or two goods, or are its imports/exports more diversified?)

Problem 3. (Ricardian model) [week 2]. Consider two countries, Home and Foreign, which are closed to international trade.  Home has 1200 units of labor available, and Foreign has 800 units.  Both countries can produce two goods, apples and bananas.  Home’s unit labor requirement in apple production is 3, while in banana production is 2.  Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1.

a) Graph Home and Foreign’s production possibility frontiers.

b) Define opportunity cost.  Compute Home and Foreign’s opportunity cost of apples in terms of bananas.

c) In the absence of trade, compute the price of apples in terms of bananas at Home and Foreign, assuming that consumers in each country like to consume both goods. Explain.

d) Assume now that the two countries open to trade with each other.  Define comparative advantage. Which country has comparative advantage in apples? And in bananas?  Explain.

e) Construct the world relative supply curve. Show it in a graph.

f) Assume that the world relative demand takes the following form: (Demand for apples)/(Demand for bananas) = (Price of bananas)/(Price of apples), that is . Plot the relative demand curve in the graph in e). Compute the equilibrium relative price of apples.

g) Describe the pattern of trade (who exports what?). Explain.

Problem 4. (Heckscher-Ohlin model) [weeks 3 and 4] Consider a world with two countries, Home and Foreign, both able to produce two goods: cloth and tablet computers. The production of both goods uses capital and labor in fixed proportions, with the tablets industry using more capital per worker than the cloth industry.  The units of each input needed to produce one unit output are given by:

Both countries have 150 units of capital available for production, but the Home country has 100 units of labor whereas the Foreign country has 200.  Consumers like to consume both goods and have the same preferences in both countries.  Assume that the countries are closed to international trade.

a) Construct the PPF for both countries and put them in the same graph.  Show in the graph the quantity of both cloth and tablets that are produced by each country in equilibrium, if the countries are not trading. [HINT: assume regular indifference curves and use the graph to determine the quantity of each good demanded at the highest indifference curve.]  Compute these quantities algebraically.

b) Which country produces more cloth relative to tablets?  Indicate how this feature relates to the country’s relative factor endowments.

c) Compute the quantities of labor and capital employed in each country in the production of each of the goods at the output levels in a).

d) Indicate the range of prices of cloth relative to tablets at which the Home country will produce both goods.  Which good would be produced if the relative price was outside of this range?

e) In which country will the price of cloth relative to tablets be higher?  Explain.

f) Assume that both countries open to trade with each other. Explain how the price of cloth relative to trade will change in each country after opening to trade.

g) According to the Heckscher-Ohlin theorem, if these two countries opened to trade, which country would export which good?  Explain.

h) Trade may affect the owners of each factor of production differently.  Give intuition about who will be better off and who will be worse off in each country after opening to trade. Explain.

Problem 5. (Standard trade model) [week 4] Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Use the relative demand-relative supply graph in figure 6-4 (b) in your textbook to analyze the impact on Japan’s terms of trade of the following events:

a) A war in the Middle East disrupts oil supply.

b) Korea develops the ability to produce automobiles that it can sell in Canada and the US (big markets for Japanese cars).

c) US engineers develop a fusion reactor that replaces fossil fuel electricity plants.

d) A harvest failure in Russia.

e) A reduction in Japan’s tariffs on imported beef and citrus fruit.