ECON 3HH3 Chapter Notes - Chapter 2: Economic Equilibrium, Demand Curve, Diminishing Returns

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21 Apr 2018

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Chapter 2 trade and technology: the ricardian model. Sometimes neighboring countries take advantage of their proximity by joining into a free-trade area in which the countries have no restrictions on trade between them. High demand for equipment or the ready supply of a complementary good. Geography can affect the exports including the natural resources (land and minerals), labor resources (labor of various education and skill levels) and capital (machinery and structures) Cou(cid:374)t(cid:396)(cid:455)"s (cid:396)esou(cid:396)(cid:272)es : la(cid:374)d, la(cid:271)o(cid:396) a(cid:374)d (cid:272)apital used to p(cid:396)odu(cid:272)e goods a(cid:374)d se(cid:396)(cid:448)i(cid:272)es a(cid:396)e collectively called its factors of production. Offshoring: a process in which a company spreads its production activities across several countries and trades semi finished products among them. Aa: when a country has the best technology for producing a good it has a aa in the production of that good. Aa is not a good explanation for trade patterns.

Related Questions

In this module, we have learned that the trade balance, interest rates, and exchange rates are all related in an economic and fiscal policy. For decades, the United States and China have traded products through imports and exports, and for the most part, China is able to produce items at a lesser cost than the United States. Americans love a good value, but they also want quality. China, on the other hand, has grown dramatically and continued with âindustrializingâ the country, which has cost the government billions of dollars. Throughout this course, we will investigate the ongoing trade between these two countries, the costs of multinational companies that expand or complete business through the import and export exchange, and how the ongoing practice may create economic changes and instability for the individual organization.

Research the balance of trade in the United States and China and relate how historical changes in exchange and interest rates have affected imports and exports between the two countries.

Specifically address the following:

Explain how trade balance, interest rates, and exchange rates are related, and cite an example of how a rise or fall in one changes the others.

Does a deficit in China or the United States change the overall advantage or disadvantage of trade? Why?

Explore how the cost and quantity of imports and exports, such as electronic equipment, may be challenged by the rise and fall of these rates.

Incorporate the fluctuations of supply and demand into the costs incurred and decide ways management calculates estimations for further product needs.

Explain the philosophy of âinternational crowding out,â citing an example of how this may occur, and describe how excessive borrowing in one country has affected interest rates in the United States.

As an example, China and the United States âborrowâ from each other to finance needs by purchasing government-backed securities from the other country. This practice provides one country with additional funds and also gives the purchasing country more control over interest rates or âborrowing costsâ in the future. How does this influence interest rates in the domestic country and foreign country? Can one country gain control over another financially by continually financing another countryâs debt?

1.In the Ricardian model, wages are equal across industries because:

A.employers care for their workers.

B.workers prefer to work in exporting industries.

C.workers are freely mobile between industries.

D.workers are freely mobile between countries.

2.Suppose that the U.S. price index for its imports rose from 100 to 120 from 2010 to 2011 and the price index for its exports remained unchanged. Which of the following statements is CORRECT?

A.The U.S. terms of trade worsened between 2010 and 2011.

B.The U.S. terms of trade improved between 2010 and 2011.

C.The U.S. terms of trade improved in 2010 and worsened in 2011.

D.There was no change in the U.S. terms of trade between 2010 and 2011.

3.Assume that marginal product of labor is constant. If the maximum number of units of cloth produced is 300 and the maximum number of units of corn produced is 600, then with a MPLcloth = 2, what is the MPLcorn?

A.4

B.5

C.6

D.7

4.Suppose after opening up for trade the Home country produces 60 units of chemicals and 20 units of clothing. But Home consumes 40 units of chemicals and 60 units of clothing. What is the international price of chemicals?

A.1/2 unit of clothing per unit of chemicals

B.one unit of clothing per unit of chemicals

C.two units of clothing per unit of chemicals

D.three units of clothing per unit of chemicals

5.It can be shown that differences in âbefore-tradeâ relative prices will determine:

A.which nation has the absolute advantage.

B.which good each nation will export or import.

C.the quantity traded by each nation.

D.which nation has higher wages.

6.Suppose after opening up for trade the Home country produces 60 units of chemicals and 20 units of clothing. But Home consumes 40 units of chemicals and 60 units of clothing. Which product does Home export?â

A.Clothing

B.Chemicals

C.It exports neither chemicals nor clothing.

D.It exports both chemicals and clothing.

âJapanese labor productivity is roughly the same as that of the US in the manufacturing sector, while the US is more productive in the service sector. But most services are nontradable. Some have argued that this poses a problem for the US, because USâs comparative advantage lies in things US cannot sell on world markets. â

To evaluate this statement, develop a small Ricardian model: Japan has roughly a third of the population of the United States, so set L = 30 and L â = 10. Suppose there are two manufacturing sectors (i.e., cars and electronics), and a non-tradable service sector. Suppose that the technologies have labor productivity of one in all sectors for Japan. Let the US have a labor productivity for manufacturing sectors of one as well, and a productivity of services of 2. Let utility be Cobb-Douglas, with a share of expenditure on cars and electronics of 0.15 each, and a share of expenditure on services of 0.7. Suppose there are extremely small trade costs between countries, which you normally ignore, but in case of indifference between home and foreign sourcing in the absence of trade costs, the good will be bought from home. Trade costs are infinite for services.

1. Solve the model, e.g., derive results for production, consumption, wages, and prices in each country and calculate welfare in each country.

2. Now assume that the US had a labor productivity in services of 1, but a labor productivitity in cars of 2. Again, solve the model, e.g., derive results for production, consumption, wages, and prices in each country and calculate welfare in each country.

3. Use your results from the previous to steps to comment on the statement above.

ECON 3HH3 Chapter Notes - Chapter 2: Economic Equilibrium, Demand Curve, Diminishing Returns

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