Econ 2 - Assignment Example

Economics of International Trade ASSIGNMENT2 (Covers Week 5-9) Instructions Submit in full one document with MS word file format only. All other formats but MS word will not be graded. If more than one file submitted, only a randomly selected file will be graded.2. You must submit your file in the Blackboard, the Assignment2 section only. Do not forward to your instructor. All email attachment forms or hardcopy forms of submissions will NOT be accepted. 3. This assignment weighs 20% of your final grade.

Question 1Suppose the two countries, Norway and Sweden. Norway has a long coast that borders on the north Atlantic and is more productive in fishing. Sweden has a greater endowment of capital and is more productive in automobile. Assume the two countries trade each other, with Norway exporting fish to Sweden and Sweden exporting Volvos (automobiles) to Norway. Explain the gains from trade between the two countries using the standard trade model. Assume that the tastes for the goods are the same in both countries, but the production possibilities frontiers differ.

Norway Sweden Sweden has comparative advantage in Volvos while Norway has a comparative advantage in fish. The free trade relative price is different from the autarkic relative price and thus both countries gain. Both countries specialize in their comparative goods and thus they gain. The minimum expenditure that is needed to attain the autarkic level of utility at autarkic prices is lower than the minimum expenditure required in achieving the free trade level of utility at autarkic prices.

Question 2Evaluate the relative importance of economies of scale and comparative advantage in causing the following:Most of the world’s aluminum is smelted in Norway or Canada.Half of the world’s largest jet aircraft are assembled in Seattle.Most semiconductors are manufactured in either the U.S. or Japan.Most Scotch whisky comes from Scotland.Much of the world’s best wine comes from France.Most of the world’s aluminum is smelted in Norway or Canada.The few locations for production show external economies of scale in production and thus when the operations are large, the internal economies of scale in production also become large.

Half of the world’s largest jet aircraft are assembled in SeattleThe economies of scale are important in airplane production and thus only a small number of firms do it in few locations. Seattle is one such location. The competition is imperfect.Most semiconductors are manufactured in either the U.S. or JapanThe external economies of scale are important in production of semiconductors and the industries are concentrated in certain locations. Thus if a semiconductor industry is established in a certain location, the export of semiconductors by the country will not be due to comparative advantage but the economies of scale.

Most Scotch whisky comes from Scotland.It is true, and Scotch only comes from Scotland since it requires skilled distillers who are mostly found in the region. The region also features favorable climatic and soil conditions for the grains used in the production of scotch.Much of the world’s best wine comes from FranceFrances climatic and land conditions generate comparative advantage on production of wine.Question 3Suppose that in monopolistic competition, the number of firm affects market price (P) and average cost (AC) for a firm with the following way below.

andwhere c is marginal cost, n is number of firms, b is the demand parameter, F is fixed cost, S is market share etc.And currently, c=5000; F=750,000,000; b=1/30,000; S1=900,000; S2=1,600,000; S3=3,750,000 where S1 is market share for Country 1, etc.Identify if there is an economies of scale existed and consumers having better off with free trade.Country 1P= AC, thus firms will not leave or enter the industry since the economic profits is zero and the market is on a long run equilibrium.Country 2P= AC, thus firms will not leave or enter the industry since the economic profits is zero and the market is on a long run equilibrium.

Country 3P >AC, More firms will enter the industries since there are economic profits.Question 4Suppose that a demand for and supply of a product for Home and Foreign are given as follows: Home: D = 100-20P; S=20+20P; Foreign D* = 800 – 200P, S* = 400 + 200P. Analyze the welfare effect if the government adopts a tariff of $0.5 per unit imported in order to protect Home producers. Home imports demand schedule Foreign exports supply curve When a tariff of $0.5 is imposed on imports, the MD is modified while the supply curve remains unchanged.

MD = 80 − 40 (P + t) = 80 − 40(P + 0, 5) = 80 − 20 − 40P = 60 − 40PMD=XS; 60 − 40P = −400 + 400P; PT*=1.05PT = PT*+ t = 1.05 + 0.5 = 1.55D = 100 − 20 × 1.55 = 69S = 20 + 20 × 1.55 = 51New volume = 18 (Government revenue)Reduction in consumer surplusQuestion 5Suppose a small country with the following supply and demand curves:D = 400-5P; S=20+10P; And the world price of this product is $10 per unit. In addition, each unit of production yields a marginal social benefit of $10.

Discuss the total welfare effect of a tariff of $5 per unit imposed on imports.Discuss the total welfare effect of a production subsidy of $5 per unit produced.Total welfare effect of a tariff of $5 per unit imposed on importsDemand and supply curves, Calculate the equilibrium in the domestic market15P = 380; P=25.3(domestic price)Substitute the domestic price in the demand and supply to obtain domestic quantityD= Autarky (273.5, 25.3)The country consumes more than it produces since the price is 10 per unit, thus the price of 10 is will be substituted into domestic demand and domestic supplyQuantity supplied, S= 20+10(10) = 120, QS Quantity demanded, D =400- 5(10) = 350, QD Imports= QD- QS; 350-120= 230Imposing a $5 per unit tariff, the domestic price is 15, the new demanded and supplied quantities are obtained as followsQuantity supplied, S= 20+10(15) = 170, QS Quantity demanded, D =400- 5(15) = 325, QD Imports= QD- QS; 325-170= 155Initial situation and excess demand curve are show in the figure Consumers will experience loss in the shaded region if the prices change.

The magnitude of the loss is = (325x5) + (25x5/2) = 1687.5.Producers win the shaded area up to the supply curve = (120x5) + (50x5/2) = 725The government wins in the area between 170 and 325 and the win = (170x5) = 850Marginal social benefit of 10 per the extra units of production = (50x10) = 500All the changes result in = -1687.5+752+850+500= 414.5 (gain). Total effect of a production subsidy of $5 per unit producedThe production subsidy creates an imaginary shift of the supply curve to the right since producers are willing to supply larger quantities at every price due to the subsidy.

The rightward shift crosses the $10 line at the quantity, 170 and producers gain in the area, which is given by (120x5) + (50x5/2)= 725, the government will lose an amount = (170x5) = 850 and the social benefit = (10x50) = 500Consumption is constant at 350 since consumers are not affected by the production subsidy. Production increases to 170 and the imports reduce to = 350-170 = 180.The balance resulting from the policy is = 725-850+500 = 375.Works citedGoldberg, Linda S., Michael W. Klein, Jay C.

Shambaugh, and Paul R. Krugman. Study guide to accompany International economics, theory and policy, sixth edition, Paul R. Krugman, Maurice Obstfeld. Boston, Mass.: Addison Wesley, 2003. Web. 8 July 2014 < http://books.google.com/>