ECF3121 Economics of international trade HOMEWORK 1 SOLUTIONS/ANSWERS

 

1
Choose a country whose economic situation is of interest to you, and answer questions 1-3.
Congratulations! You just became the Minister of Trade there and you want the key data for
your country to assess its position in the global economy.
Question 1
For an overview of your country's trade go to https://atlas.cid.harvard.edu/explore. On the
right side of the webpage, choose your country. Visualize "Exports" or "Imports" using a
"Tree Map" "by Partner". Take a picture of each data visualisation you use to answer the
questions 1a.-1c. and place it near the relevant answer.
1a. Visualize "Exports" (select the "Exports" tab): list the top three countries your
country exports products to.
1b. Visualize "Imports" (select the "Imports" tab): list the top three countries your
country imports products from.
1c. Use what you have learned so far from this unit to explain why your country
trades so much with these countries.
Question 2
Now go to https://atlas.cid.harvard.edu/explore. On the right side of the webpage, choose
your country. Visualize "Exports" using a "Tree Map" "by Product". Take a picture of each
data visualisation you use to answer questions 2a. and 2b., and place it near the relevant
answer:
2a. Find the three products with highest share in total exports (please do not
consider “Unspecified” goods”).
2b. Find the three products with highest share in total imports (please do not
consider “Unspecified” goods”).
Question 3
From the list of partners, you found answering question 1a.: choose one of your country’s
top trade partners. Now, go to https://atlas.cid.harvard.edu/explore. On the right side of the
webpage, choose your country. Visualize "Exports" (or “Imports”) using a "Tree Map", and
select the country's top trade partner you have chosen in the "by Partner" menu. Take a
picture of each data visualisation you use to answer the questions below and paste them near
the relevant answer:
3a. What is the main product your country exports to its top trade partner?
3b. What is the main product your country imports from its top trade partner?
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3c. Based on your answers to 3a. and 3b. what could explain the trade between
your country and its top partner?
Question 4
Assume we are in a Ricardian world where there are only two countries: Japan and Brazil.
These countries produce two goods: motorcycles and chemicals. Japan has 50 units of labor
(LJPN=50), and Brazil has 100 units of labor (LBRA=100). The table below summarizes the
technology available in Japan and Brazil.
a) Which country has an absolute advantage in motorcycles? Explain why.
b) For Brazil, draw the Production Possibility Frontier (PPF). Show the formulas you
use to derive the intercepts and slope of the PPF.
c) In autarky, what is the price of chemicals /price of motorcycles (PC/PM) in each
country?
d) Which country has a comparative advantage in chemicals? Which one has it in
motorcycles? Explain your answer.
e) In the diagram drawn for question c), add in Brazil’s indifference curve and
Consumption Possibility Frontier (CPF). Clearly label each of them. Indicate the
autarky equilibrium point, labelling it A.
Question 5
Continuing from question 4, suppose Japan and Brazil are free to trade.
a) What should Japan export and why? What should Brazil export and why?
b) Are countries completely specialized in the free-trade equilibrium?
c) What is the possible range in which the world relative price of chemicals, PC/PM,
could fall?
Suppose that in the free-trade equilibrium the relative price of chemicals is PC/PM=1/6.
Marginal Product of
Labor (MPL)
Japan Brazil
Motorcycles 2 1
Chemicals 6 9
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d) In the diagram drawn for questions 4b) and 4e), draw the free trade equilibrium.
Indicate the shift in the relative price line. Identify the new point of production and
label it B. Indicate the new point of consumption and label it C.
Question 6
You work for Matthew Park the CEO of HRNO, a clothing manufacturer in Australia.
Matthew Park is evaluating whether his company should relocate at least some production
abroad. He has hired you to help him form an informed opinion in preparation for a meeting
with stakeholders. On your first day of work, he hands you a stack of editorials to analyze,
beginning with a short article from The Economist, When cheap is not so cheap, which
appeared on September 2, 2014 (reproduced below).
a. Matthew Park is struggling to understand what productivity-adjusted wages are and
why they enter the calculation of manufacturing costs in place of (unadjusted) wages.
Please clarify this for Matthew in a short paragraph of maximum 100 words,
explicitly referring to the Ricardian model you have learned in this unit.
b. Matthew is also confused by the graph of Manufacturing Cost Index, by country.
Please explain to Matthew how to interpret the graph and what the Manufacturing
Cost Index captures in a short paragraph of maximum 100 words.
c. Based on the Manufacturing Cost Index and other economic factors, which of the
world’s top 25 export economies should Matthew seriously consider for offshoring?
Please explain your answer in a short paragraph of maximum 100 words.
4
When cheap is not so cheap
Rethinking “low-cost” and “high-cost” manufacturing locations
WHEN managers are choosing where to locate a new factory, their decision depends on
many things. Cost is one of them. But costs come in many forms and change constantly.
Alongside labour costs, there are also those for raw materials, energy, transport and much
else besides. Currencies move too. Yesterday’s low-cost location may turn out to be
tomorrow’s money-pit.
Rising Chinese wages have received much attention in recent years, with observers
wondering what the next cheap Asian country will be to take a chunk of China's
manufacturing job-growth. Average factory wages have more than quintupled, in nominal,
renminbi-denominated terms since 2004. Productivity levels have also grown, but China's
currency has appreciated, offsetting some of the savings. Other countries are also said to be
moving up and down the cost rankings. For example, America and Mexico are becoming
increasingly affordable, Brazil less so.
A new study by the Boston Consulting Group (BCG), a
management consultancy, has crunched the numbers in an
attempt to determine which countries the many variables
currently favour (see chart). BCG looked at the world’s
25 biggest exporters and created an index of
manufacturing costs including productivity-adjusted
wages, electricity, natural gas and currency movements,
based on the typical American company.
BCG reckons that America and Mexico really are “rising
stars”. American wage restraint and newly cheap energy
have improved its attractiveness to manufacturers. And
Mexican wages have grown less than 50% in dollar terms
over a decade, leaving them 13% cheaper (adjusted for
productivity) than China’s. Relative drops in Mexico’s
energy prices, which were traditionally considered
relatively high, have also boosted the country's
competitiveness.
In contrast, five locations traditionally considered lowcost
are now under pressure. Besides China, they are
Brazil, Russia, Poland and the Czech Republic. Brazil was
never particularly cost-competitive, and corruption and
politics deter investment in Russia despite low energy
costs. But the declining allure of the two central and
eastern European countries is a greater surprise. Poland
has seen big gains in productivity, but wages have risen
even faster. A strengthening currency, the result of the
country's flourishing economy, has also added to the
pressure.
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Costs matter in different ways to different manufacturers; low-cost labour matters more to
firms that make clothes, whereas cheap energy is much more important to the chemicals
industry, notes Justin Rose of BCG. There is much that even a well-designed index of costs
cannot capture. Proximity to European markets, for example, remains a great strength for
Poland and the Czech Republic, while it is hard to quantify the biggest drags on Russia's
growth.
Once they are established, local clusters—of employees, infrastructure and know-how—
become a durable advantage, as in China’s case. But Mr Rose argues that as the cost
advantage of a country like China or Russia deteriorates, hard-to-measure factors such as
corruption assume greater significance. If a “low-cost” country is just a few percentage points
cheaper when it comes to routine costs, but more troublesome in other ways, the comparison
can become “a wash”, he says. That bodes ill for the likes of China and Russia, where costs
are rising but the risks of doing business remain high; and it may help insulate the Czech
Republic and Poland. All the same, in all these cases, what may have seemed cheap at first is
now starting to look rather more expensive.