ECON 341 International Trade SEMESTER ONE 2022
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ECON 341
SEMESTER ONE 2022
ECONOMICS
International Trade
Question 1 (15 marks)
In each of the following scenarios, distinguish the short-term and long-term impacts of the policy or phenomenon on the economies mentioned in each question.
Focus on impacts on the most relevant aspect of the economy, choosing from (i) economic structure (identify sectors that will grow or shrink), (ii) international trade (imports and exports), (iii) labour market (jobs and wages), (iv) consumers (prices) . Note that not all of these may be impacted by each policy/phenomenon.
Use appropriate references to trade models and graphs. Graphs should be clearly labeled and explained.
a) The NZ government has announced restrictions on post-study work rights for international students. Post-study work rights allow international students to live and work in NZ after their study. The changes proposed are:
• Students in non-degree level courses will not get post-study work rights except where they are studying and then working in specified shortage and skilled occupations
• For degree-level and other eligible international students the length of time they can work after their studies will mirror the time they study in New Zealand. Currently some students can work for up to three years after just 30 weeks’ study. Masters and PhD students will retain the right to work in New Zealand for up to three years after their studies
• Students will also not be able to apply for a second post-study visa in New Zealand.
[Accessed on 15 May 2022 at https://www.newshub.co.nz/home/politics/2022/05/new-zealand-full-border-reopening-date- set-significant-changes-for-immigration-international-students-announced.html]
Evaluate the impact of this policy on the NZ economy. (5 marks)
b) The accession of China into the WTO led to a massive increase in exports of low-skilled labour-intensive products such as textiles, toys and electronics from China. This “China shock” negatively affected manufacturing in advanced countries.
Evaluate the impact of the “China shock” on regions in the US that produce low-skilled labour-intensive products. (5 marks)
c) Systematic and extensive sanctions have been imposed on Russia following the conflict in Ukraine. Some sanctions have taken the form of an import tariff on imports from Russia and an export ban on exports to Russia of sanctioned products, which include almost all products expect those needed for medical and humanitarian puposes.
Evaluate the impact of these sanctions on the Russian economy. (You can ignore sanctions on
bank transactions for this question.). (5 marks)
Question 2
Answer the following questions. Explain your arguments concisely. (15 marks)
a) China has recently applied to join the CPTPP (Comprehensive and Progressive agreement for Trans-Pacific Partnership), whose current members are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
Should NZ vote for including China into the CPTPP? In other words, do the benefits of China
joining the CPTPP outweigh the costs for NZ? (3 marks)
b) Why is the Krugman monopolistic competition model a good theoretical foundation for the gravity model of trade? (3 marks)
c) Consider a monopoly operating in the Home country in a given industry in autarky. The firm’ marginal cost is constant and given by c . Start with a graph of the monopoly equilibrium. Clearly label the monopoly quantity q0 and price p0 at Home. Suppose that the economy opens up to trade and a Foreign firm is able to sell in the Home market at marginal cost cT where T refers to transport cost. The new equilibrium price at home falls to p1 . At this price, quantity qH is supplied by the Home firm and the rest is supplied by the Foreign firm.
i) Identify the impacts of Home opening up to trade on welfare at Home, focusing on Home consumers and the Home firm. Label gains/losses in consumer and producer surplus clearly on your graph. (1 mark)
ii) Identify the gains/losses for the Foreign firm in the Home market and label these gains/losses clearly on your graph. (1 mark)
iii) Assume that any gains/losses for the Foreign firm in the Home market accrue to the Home country (in other words, the Foreign firm’s gains/losses can be treated as the Home country’s gains/losses). Has Home’s opening up to trade been good for its welfare? What are the sources of the welfare gain or loss? ( 1 mark)
d) Do you think the Liontief’s paradox would hold for New Zealand? Why or why not? (3 marks)
e) Suppose that the US (a large country) imposes an import tariff on dairy products. How is such a tariff likely to impact New Zealand welfare, where New Zealand is a net exporter of dairy? Use diagrams where appropriate and clearly state any assumptions you have to make. (3 marks)
Question 3 (12 marks)
Malaysia and Ghana are two countries in the world producing textiles (T) and electronics (E). The unit labour requirements in worker hours per unit for each product in these countries is given by the following table.
|
Malaysia |
Ghana |
Textiles |
2 |
4 |
Electronics |
1 |
4 |
You are given that both countries are engaged in free trade. Under trade, Malaysia produces both textiles and electronics, while Ghana produces one product. Consumer preferences in each country are identical, with utility given by U=TE (T multiplied by E). The absolute value of the marginal rate of substitution between E and T is T/E (T divided by E). Let the price of E equal 1.
a) Which product does Ghana produce? Why? (1 mark)
b) What is the world price of electronics relative to textiles? (1 mark)
c) In Malaysia and Ghana, how much T and E do consumers consume? What are their utilities? (4 marks)
Now suppose that Malaysia learns by doing and becomes more productive in electronics. Its unit labour requirement drops to ½. Its unit labour requirement in textiles remains 2. There is no change in unit labour requirements in Ghana.
d) Repeat the exercise in c). (4 marks)
e) Compare your results in c) and d). Which country benefits from the productivity improvement in Malaysian electronics? Does any country lose? (1 mark)
f) Comment on the role played by international trade in spreading gains from improvements in technology. ( 1 mark)
Question 4 (8 marks)
Intel is considering opening a new plant in Latin America. Brazil and Argentina are both offering the company a subsidy to induce it to invest in their country because they are convinced that such a plant would create important externalities–e.g. because Intel will train local workers. Intel itself is indifferent between moving to one country or the other.
The values that Argentina and Brazil attach to having the plant in one of the two countries are:
|
Argentina |
Brazil |
Plant in A |
5 |
0 |
Plant in B |
3 |
3 |
that is, ifIntel goes to Argentina the country values the plant at 5 units, while Brazil thinks that in this case it will reap no externalities. If Intel goes to Brazil, Brazil values having the plant 3 units. Argentina thinks that an Intel plant in nearby Brazil, while not as good as having it at home, will still create an externality, whose value is 3–perhaps because some Argentinian workers will migrate north.
a) Show that if both countries offer a subsidy, Intel will decide to invest in Brazil, which is obviously the best solution. (HINT: start by asking how large a subsidy would each country be willing to offer). (2 marks)
Next assume that Intel plans to build 2 plants, and is again indifferent as to their location. The plants are built one after the other. The benefits Argentina and Brazil attach to having these plants depend on where they are located and on the sequence in which they are built, according to the following table.
|
Argentina |
Brazil |
(A, A) |
9 |
0 |
(A, B) |
6 |
6 |
(B, A) |
7 |
7 |
(B, B) |
0 |
13 |
where (X, Y ) means that the first plant is built in country X, the second in Country Y . The best solution is obviously to locate one plant in each country and start the investment in Brazil. But assume that the two countries do not coordinate on the first best and offer subsidies independently. Then:
b) Start from the decision of where to locate plant 2. Show that, if plant 1 is built in A, then B will attract the second plant by offering a subsidy of 3 units (in reality a penny more than 3 units will be enough); if instead plant 1 is built in B, then A will attract the second plant by offering a subsidy of 6 units–also plus a penny. (2 marks)
c) Now go back to the decision where to locate plant 1. Show that A will win the first plant. (2 marks)
d) Discuss the effectiveness of subsidies in this case, and compare it with your finding in the first part of the problem. (2 marks)
2023-06-21