Class 2

Question 1

(2) Factor Price Ratio

Answer 1

Factor Price Ratio = Cost of 1 unit Labour / cost of 1 unit Capital = w/r

Question 2

(2) with 1 country, 2 industries, what happens when the factor price ratio changes?

Answer 2

both industries will adjust to the new factor prices by employing more of the factor that has become relatively cheaper and less of the factor that has become relatively more expensive

Question 3

(2) Production Possibilities Frontier

Answer 3

shows how much cloth and wheat (or two other products) can be produced simultaneously (given the country’s resources and technology) and how much cloth and how much wheat is produced given the country’s preferences for cloth and wheat in light of all production possibilities

Question 4

(2) General equilibrium in the economy (1 country, 2 factors)

Answer 4

summarized at the point of tangency of the relative product price line (Pw/Pc) and the Production Possibilities Frontier

Question 5

(2) Commodity Price Convergence

Answer 5

when you open up to trade with the world, the system moves to world prices. The good which is relatively more expensive will fall and the good which is relatively cheap will rise

Question 6

(2) What happens when you open trade up internationally?

Answer 6

-The country with a comparative advantage in a product will increase production of that product and decrease production of their other product. -They will export their comparative advantage product and import the other product-The previously different (country-specific) commodity price ratios (Pw/Pc) will converge to a common Pw/Pc for world prices

Question 7

(2) Trade Triangle

Answer 7

a diagrammatic construction to compare the production (and thus the factor usage) in one country before trade and after trade

Question 8

(2) Driving forces of trade

Answer 8

to produce goods (and services) in the places where they can be produced most efficiently, and to sell (or direct) those goods to the places where they are valued most highly

Question 9

(2) With Trade Liberalization there are…(3)

Answer 9

1. Product prices converge to world prices2. Countries move towards industrial specialization, but not to full specialization3. Factor prices converge to the world factor price ratio

Question 10

(2) What happens with trade liberalization and it’s effects on the factor price ratio?

Answer 10

-Production in one country shifts toward more labour-intensive production and less capital-intensive production-Production in the other country shifts to less labour-intensive production and more capital-intensive production-The country that shifts toward more labour-intensive production experiences an excess demand for labour and a rise in w/r (factor price ratio)-The country that shifts toward more capital-intensive production experiences an excess supply of labour and a fall in w/r-eventually a new world factor price ratio (w/r) comes to lie between the pre-liberalization w/r of the two individual countries-this is factor price convergence

Question 11

(2) Efficiency gains

Answer 11

when two countries open up to trade and each country does their specialization, then the world production of both goods expand and the world enjoys “efficiency gains”

Question 12

(2) What happens when you increase supply of a factor? (ex technology improvement)

Answer 12

-The increased supply of a factor lowers the cost of that factor relative to the other factor-in the country that experiences the increased supply: the industry that uses the increased factor intensively gains a relative cost advantage and it’s production increases. the industry that does not use the increased factor intensively suffers a relative cost disadvantage and it’s production decreases. -The world price of the increased factor falls-the world price of the product that uses the increased factor intensively falls-trade increases

Question 13

(2) Exports in Japan

Answer 13

-in Japan exports are a small percentage of GDP (13%)-japan has been expanding its exports, but it’s reluctant to open its doors to imports-Japan has been in a dark period since they are not open to immigration-they have an aging economy that is causing it to have it’s own labour force shrink and it hasn’t found a way to collectively decide on how it’s going to open its doors to other sources of labour-this is one of the reasons exports are so low in japan

Question 14

(2) Importance of trade - big vs little countries

Answer 14

-in the US trade is a smaller percentage of GDP (11%) because the US is so large-smaller countries rely on trade more and they are the most vulnerable

Question 15

(2) Canada’s Trade with the US

Answer 15

-Canada is disproportionately engaged in trade with the US (72% of exports to US, and 62% of imports from US)-this is down from what it used to be, because of the rise of asian economies-these figures have shaped canada’s concern about international trade

Question 16

(2) Why does Canada import energy?

Answer 16

we make tons of energy, but our energy does not go much further than Toronto, so the areas east of toronto (ie. Atlantic Canada) has to import oil

Question 17

(2) Revealed Comparative Advantage

Answer 17

-We want to look at what sectors are growing (for exports) and how big a part they play in the total share in Canadaex. Exports of crude petrolium is growing at 13% and the share in canada is 15%, so we have a comparatie advantage in it-we can see from the numbers what Canada is good at and what Canada is not so good at-where we do not have a revealed comparative advantage we import

Question 18

(2) World price

Answer 18

the price which a traded goods trade, net of any tariffs-These are the proper prices to evaluate in the world of traded goods

Question 19

(2) Production Possibilities Curve

Answer 19

-shows how a nation’s industry can shift from one production activity to another-a nation can substitute a unit of wheat production for units of cloth production and vice versa-the slope of the PPC is the marginal rate of technical substitution of wheat for cloth

Question 20

(2) Comparative Advantage

Answer 20

-what a country is relatively more efficient at producing-if each nation were to specialize in its comparative advantage and trade freely with others, then the world would get the most output from its limited resources-market economies and free trade would naturally exploit comparative advantage

Question 21

(2) Tariff

Answer 21

-a tax on an imported good-the tariff-inclusive price of an imported good in the importing country is higher than the world price-the domestic price of a good subject to a tariff increases to the “world price + tariff”-domestic demand for a good subject to a tariff is less than it would otherwise be (because it’s more expensive now)-domestic production of the good increases, but is less efficient than if the good was imported-there is also loss of consumer surplus-damage is also done on exporting countries of this good who now lose exports, jobs and profits

Question 22

(2) The effects of a tariff depend on…

Answer 22

-elasticity of domestic supply-depending on the slope of the supply curve, the impact of the tariff will be more or less-the greater the elasticity of supply, the lower is the tariff required to achieve a given degree of protection to domestic production

Question 23

(2) Effect of removing a tariff

Answer 23

-reverses the losses-production becomes reallocated to where it is done most efficiently-however the distribution of the gains and losses (both across countries and within countries) is unlikely to be even-tariff policy (and the removal of tariffs) is a political process

Question 24

(2) Effect of removing ALL tariffs

Answer 24

1. trade expands2. nations reallocate production inline with comparative advantage3. commodity price ratios converge to a “world commodity price” ratio4. factor price ratios converge to a “world factor price” ratio

Question 25

(2) what is the difference between a tariff and any other trade-inhibiting imposition?

Answer 25

Not much-other trade-inhibiting impositions include quotas, differential standards or differential taxes (for example on transportation)-virtually no difference in terms of the allocative effects (production and consumption) but differences in government revenue

Question 26

(2) tariff effect on large vs small countries

Answer 26

country size makes an important difference in the distribution of effects of trade restrictions-small countries unambiguously suffer-small refers to whether a country is large enough to affect the world price of a particular good-small countries almost always hurt themselves with import tariffs-a large country can potentially improve its terms of trade with an import tariff - the improvement can be sufficiently large to offset the negative effects of production inefficiencies its tariff induces (optimum tariff)

Question 27

(2) Optimum tariff

Answer 27

The optimum tariff is one which maximises imposing country’s gain or welfare from trade.-a large country’s demand may be sufficiently large than it can “force” exporting nations to reduce their selling price of exports

Question 28

(2) Effective Protection

Answer 28

a nation will import a raw material duty-free but will impose a tariff on final products produced with the imported inputex. countries that have no tariff on coffee beans but high tariffs on roasted coffee. they are protecting their industries scope to add value

Question 29

(2) Nominal vs Effective tariff

Answer 29

-nominal tariff is the tariff imposed on an imported final good-effective tariff is the amount of tariff in relation to the value added of a good. for example if value added of a suit is $20, and the tariff to import is $10, then the effective tariff is 50%-if you can import the raw materials of the good without tariff and but final product has tariff then effective tariff is different than nominal tariff-if raw material tariff is same as final product tariff then effective tariff = nominal tariff

Question 30

(2) Technical progress means…

Answer 30

-you can get more outputs for the same inputs-the marginal product of that input has risen

Question 31

(2) Rybczynski Theorem

Answer 31

-at constant commodity prices an increase in the endowment of one factor will increase by a greater proportion the output of the commodity that is intensive in that factor-if a nation acquires more of one factor of production, that factor becomes “locally inexpensive” and industries will shift production in favour of that factor. industries that use that factor intensively will be favoured and their output will increase

Question 32

(2) Stolpher-Samuelson Theorem

Answer 32

an increase in the relative price of a commodity (ex. as a result of a tariff) raises the return or earnings of the factor used intensively in the production of that commodity.

Question 33

(2) Dumping

Answer 33

“dumping” is a kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market competition.