ECF3121 Economics of international trade HOMEWORK 2 SOLUTIONS/ANSWERS
Question 1
Assume a Heckscher-Ohlin (HO) model of trade. Germany (GER) and Italy (ITA) produce
motorcycles (M) and textiles (T) using two factors, capital (K) and labor (L), that are mobile
across sectors. The production of motorcycles is capital intensive and that of textiles is laborintensive.
Let Germany and Italy relative supplies be represented in the diagram below:
a. Which country is relatively capital abundant? Explain your answer.
b. Add to the question diagram the relative demand of motorcycles in Germany and
Italy. Label them RDGER, RDITA, respectively.
c. Which country has a comparative advantage in textiles? Which one in
motorcycles? Explain your answer.
Now suppose countries are free to trade.
d. Describe the patterns of trade. Are these consistent with the HO theorem? Explain
briefly.
Question 2
Continuing from question 1.
a. Add to the diagram you have drawn answering question 1 the world relative supply
and relative demand of motorcycles. Label them RSW and RDW respectively.
b. What is the World relative price of motorcycles? Show it clearly in the diagram and
label it (PM/PT)W.
c. What happens to terms of trade of each country going from autarky to free trade?
d. What is the relative quantity of motorcycles produced by Italy at the world price?
Label it !"
Question 3
Assume a Heckscher-Ohlin model of trade. Alpha (A) and Beta (B) produce two goods pipes
(P) and cars (C). Alpha is relatively capital abundant. Let the diagram below represent the
relative demand for labor in each industry.
a. Which industry is capital intensive? Explain your answer.
b. Given relative factor endowments which country has a higher w/r in autarky?
c. Which country uses more capital-intensive techniques of production in autarky? Does
this make economic sense?
Now assume that countries are free to trade.
d. What happens to the techniques of production of Alpha going from autarky to free
trade?
e. In Alpha, is capital or labor better off going from autarky to free trade? Explain your
answer.
Question 4
You work for Mary Ghalligan, a member of the Liberal Party in Australia. Mary Ghalligan, is
generally sympathetic to immigration, and has hired you to help her understand better the
arguments for immigration. On your second day of work, she hands you a stack of editorials to
analyze, beginning with the article “The progressive case for immigration”, which appeared in
the Economist on March 18th 2017 and reported below for your convenience.
a) Mary Ghalligan wants you to explain to her the economists’ arguments underlying the
statement that immigration to rich-world countries “is a good thing and there should be
more of it.” Please explain your answer in a short paragraph of maximum 150 words
explicitly referring to one of the theoretical frameworks you have learned in this unit
using one or more diagrams.
b) She further would like you to explain to her what a “place premium” is in relation to
the benefits of immigration accruing to migrants. Please explain your answer in a short
paragraph of maximum 100 words explicitly referring to one of the theoretical
frameworks you have learned in this unit using one or more diagrams.
c) She is struck by Michael Anton’s warning “that the culture of “third-world foreigners”
is antithetical to the liberal, Western values that support high incomes and a high quality
of life.” Explain to Mary using your economics knowledge why or not you agree with
Anton’s statement.
The progressive case for immigration
Whatever politicians say, the world needs more immigration,
not less
“WE CAN’T restore our civilisation with somebody else’s babies.” Steve King, a
Republican congressman from Iowa, could hardly have been clearer in his meaning in a tweet
this week supporting Geert Wilders, a Dutch politician with anti-immigrant views. Across the
rich world, those of a similar mind have been emboldened by a nativist turn in politics. Some
do push back: plenty of Americans rallied against Donald Trump’s plans to block refugees
and migrants. Yet few rich-world politicians are willing to make the case for immigration that
it deserves: it is a good thing and there should be much more of it.
Defenders of immigration often fight on nativist turf, citing data to respond to claims about
migrants’ damaging effects on wages or public services. Those data are indeed on migrants’
side. Though some research suggests that native workers with skill levels similar to those of
arriving migrants take a hit to their wages because of increased migration, most analyses find
that they are not harmed, and that many eventually earn more as competition nudges them to
specialise in more demanding occupations. But as a slogan, “The data say you’re wrong”
lacks punch. More important, this narrow focus misses immigration’s biggest effects.
Appeal to self-interest is a more effective strategy. In countries with acute demographic
challenges, migration is a solution to the challenges posed by ageing: immigrants’ tax
payments help fund native pensions; they can help ease a shortage of care workers. In Britain,
for example, voters worry that foreigners compete with natives for the care of the National
Health Service, but pay less attention to the migrants helping to staff the NHS. Recent
research suggests that information campaigns in Japan which focused on these issues
managed to raise public support for migration (albeit from very low levels).
Natives enjoy other benefits, too. As migrants to rich countries prosper and have children,
they become better able to contribute to science, the arts and entrepreneurial activity. This is
the Steve Jobs case for immigration: the child of a Muslim man from Syria might create a
world-changing company in his new home.
Yet even this argument tiptoes around the most profound case for immigration. Among
economists, there is near-universal acceptance that immigration generates huge benefits.
Inconveniently, from a rhetorical perspective, most go to the migrants themselves. Workers
who migrate from poor countries to rich ones typically earn vastly more than they could have
in their country of origin. In a paper published in 2009, economists estimated the “place
premium” a foreign worker could earn in America relative to the income of an identical
worker in his native country. The figures are eye-popping. A Mexican worker can expect to
earn more than 2.5 times her Mexican wage, in PPP-adjusted dollars, in America. The
multiple for Haitian workers is over 10; for Yemenis it is 15 (see chart).
No matter how hard a Haitian worker labours, he cannot create around him the institutions,
infrastructure and skilled population within which American workers do their jobs. By
moving, he gains access to all that at a stroke, which massively boosts the value of his work,
whether he is a software engineer or a plumber. Defenders of open borders reckon that
restrictions on migration represent a “trillion dollar bills left on the pavement”: a missed
opportunity to raise the output of hundreds of millions of people, and, in so doing, to boost
their quality of life.
We shall come over; they shall be moved
On what grounds do immigration opponents justify obstructing this happy outcome? Some
suppose it would be better for poor countries to become rich themselves. Perhaps so. But
achieving rich-world incomes is the exception rather than the rule. The unusual rapid
expansion of emerging economies over the past two decades is unlikely to be repeated.
Growth in China and in global supply chains—the engines of the emerging-world miracle—
is decelerating; so, too, is catch-up to American income levels (see chart). The falling cost of
automating manufacturing work is also undermining the role of industry in development. The
result is “premature deindustrialisation”, a phenomenon identified by Dani Rodrik, an
economist, in which the role of industry in emerging markets peaks at progressively lower
levels of income over time. However desirable economic development is, insisting upon it as
the way forward traps billions in poverty.
An argument sometimes cited by critics of immigration is that migrants might taint their new
homes with a residue of the culture of their countries of origin. If they come in great enough
numbers, this argument runs, the accumulated toxins could undermine the institutions that
make high incomes possible, leaving everyone worse off. Michael Anton, a national-security
adviser to Donald Trump, for example, has warned that the culture of “third-world
foreigners” is antithetical to the liberal, Western values that support high incomes and a high
quality of life.
This argument, too, fails to convince. At times in history Catholics and Jews faced similar
slurs, which in hindsight look simply absurd. Research published last year by Michael
Clemens and Lant Pritchett of the Centre for Global Development, a think-tank, found that
migration rules tend to be far more restrictive than is justified by worries about the
“contagion” of low productivity.
So the theory amounts to an attempt to provide an economic basis for a cultural prejudice:
what may be a natural human proclivity to feel more comfortable surrounded by people who
look and talk the same, and to be disconcerted by rapid change and the unfamiliar. But like
other human tendencies, this is vulnerable to principled campaigns for change. Americans
and Europeans are not more deserving of high incomes than Ethiopians or Haitians. And the
discomfort some feel at the strange dress or speech of a passer-by does not remotely justify
trillions in economic losses foisted on the world’s poorest people. No one should be timid
about saying so, loud and clear.