| Spring 1999 | ECONOMICS 2318 | J.G. Gonzalez |
Problem Set # 1
This problem set is due Tuesday, February 9, at the beginning of the class period. Problem sets done on notebook paper or unstapled will not be accepted. Late problem sets are unacceptable also.
1. Assume that there are only two countries in the world, Singapore and Taiwan, and that there are only two commodities being produced, Brandy and Matchboxes. Furthermore, assume that 50 days of labor can produce the following amounts in each country:
Brandy |
Matchboxes |
|
Singapore |
300 |
2,500 |
Taiwan |
900 |
15,000 |
a) Describe and explain the pattern of trade.
b) Prove that the country with absolute advantage in both commodities has a higher standard of living (Note: A complete answer should include a comparison of wages across countries, that is, how much would the wages in country X as a proportion of country Y's wages be).
2. Assume that Planet Xanadu was closed to trade with the rest of the Universe until explorers from Planet Atlantis arrived in the 22nd century. At the time the explorers arrived the Xandies, the main inhabitants of Planet Xanadu, had two main industries, Ambrosia and Mead. The production of the former was capital intensive, while the production of Mead was labor intensive. When Xanadu was opened to trade with Atlantis, the planet began exporting Ambrosia and importing Mead despite the protests of Xandy laborers. Explain how the Xandy leader, Emperor Spock, could correctly argue that trade with Atlantis was beneficial, but yet Xandy laborers could be perfectly rational in opposing such trade.
3. Concentrate on the market for "Furbys" between Taiwan and the United States. Assume that a "Furby" is a homogeneous product produced under perfect competition and that there are only two countries in the world, Taiwan and the U.S.
a) Assume that Taiwan has a comparative advantage in the production of "Furbys". Show the free-trade equilibrium for "Furbys" using the supply and demand for each country, as well as the export supply and import demand (Hint: You need to draw three diagrams). Show the U.S.' domestic production and consumption under free trade.
b) Now assume that there is a large increase in the demand for "Furbys" in the U.S. Assuming that both countries maintain free trade policies, show the effects of this demand change in Taiwan’s industry and in the U.S.' quantity of imports, price of imports, domestic production, and domestic consumption.
c) Starting at the new free-trade equilibrium (in question 3.b), assume that the U.S. government wants to cut "Furby" imports to the level they had before the increase in demand took place (the level in question 3.a). Assuming that the domestic elasticities of demand and supply are similar in both countries, show graphically the appropriate tariff that achieves the objective of the U.S. government.
d) Repeat the exercise in part c), but now assume that the demand and supply elasticities are much higher in the U.S. than in Taiwan. Who pays most of the tariff now?
4. Nepal imports curry from India. Due to recent labor disruptions in India, one of the world's major curry exporters, the world price of curry has risen by 20%. Nepal's Finance Minister, Dr. Mary Batra, has urged her country to abandon trade in curry with India so as to avoid the damage that will be done by the deterioration in their terms of trade. Comment and be sure to point out correct as well as incorrect elements of the Finance Minister's proposal (use a diagram in your answer).