Engines of Globalization in International Trade
Questions 1
1. Identify a technological change that has facilitated globalization, aside from those mentioned in the text. Identify a policy change that has contributed to globalization, aside from those mentioned in the text. Explain your answers.
The following questions ask you to quantify some trends in globalization and are based on the Excel spreadsheet entitled ''Trade.data.spreadsheet.xis." The data are from the World Bank Define the "openness" of a country as the sum of its imports and exports divided by its gross domestic product (GDP).
Link to find spreadsheets... https://bcs.wiley.com/he-bcs/Books?action=resource&bcsId=8051&itemId=0470408790&resourceId=31430
2. How has the average level of openness in the world economy changed over the years in question?
3. How many countries experienced an increase in openness between 1991 and 2001? How many experienced a decrease?
4. Looking at the last year of the data, compare the average openness of the 20 largest countries (measured in terms of population) and the 20 smallest countries. Which is more open?
5. Again looking at the last year of data, compare the average openness of the 20 richest countries (measured in terms of per capita GDP) and the 20 poorest countries. Which is more open?
6. Based on your results in questions (4) and (5), summarize what kind of countries tend to be more open, and what kind tend to be less open. Can you speculate as to why this is the case?
Questions 2
1. In the model in the text, comparative advantage comes from a pure technological difference between the countries. Identify some other differences that might drive comparative advantage? Provide concrete examples from countries that are familiar to you.
2. In the model presented in the text, no one in Nigeria would have any reason to object to trade. Do you find this realistic? What assumptions does this depend on? Do you think these assumptions are crucial for the idea of the gains from trade, or for the question of how trade can affect nutrition?
Consider the following model of trade between Iceland and Finland. Assume throughout that those two countries are the only two countries in the world, at least for purposes of trade.
There are two goods: fish and wheat. Consumers always spend one fifth of their income on fish and the remainder on wheat. The only factor of production is labor.
Each Icelandic worker can produce 1 unit of fish or 1 unit of wheat per unit of time, while each Finnish worker can produce 2 units of fish or 4 units of wheat per unit of time. There are 1 million workers in Iceland and 1.5 million in Finland.
3. Which country has an absolute advantage in fish? In wheat? Which country has a comparative advantage in fish? In wheat?
4. Find the autarky relative price of fish in both countries (i.e., the price of fish divided by the price of wheat), and draw the typical worker's budget line in both countries.
5. Derive the relative demand curve relating the relative demand for fish to the relative price of fish. Solve algebraically, and then draw the curve in a diagram with the relative price of fish on the vertical axis and the relative quantity of fish on the horizontal axis.
6. Derive the world relative supply curve and draw it on the diagram that you created in Problem 5.
7. Compute the equilibrium relative price of fish under free trade, and draw the budget lines for a typical worker in each country. Which country produces which good or goods? Is there complete specialization? Who gains from trade?
8. How does your answer in Problem 7 change if Finland has 3 million workers instead of 1.5 million? Answer verbally; no computation is needed.
Questions 3
1. Your firm wants to sell its product in each of several foreign countries, and you must decide whether to do so by exporting or by producing locally for that market through FDI. Suppose that in each country the demand for the product is the same, and is given by:
Q = 100-P,
where P is the price your firm charges in that country in dollars and Q is the quantity sold there. In addition, the marginal cost of production in any country is the same and is equal to $20 per unit. Wherever you choose to produce, your firm is a monopolist. To produce in a foreign country, your firm must incur a fixed cost equal to $79. On the other hand, to produce in your home country and export to a country that is d miles away requires a transport cost of d/5, 000 dollars per unit shipped. For what range of values of d will your profit maximizing decision be the export option? The FDI option?
2. Suppose that one of the countries discussed in question (1) imposed a tariff, or a tax on imports, which your firm must then add to the cost of exporting to that country. The tariff does not apply, however, to any units you produce in that country to sell to its consumers directly. Suppose that you initially were exporting to that market, but the tariff is set high enough that you decide to switch to an FDI strategy. (This is often called tariff-jumping FDI.) What price will you now charge consumers in that country for your product? Is this tariff- induced change likely to be beneficial to that country? Should every importing country try this, or could it backfire?
3. In the model of reallocation of production under the Auto Pact in Section 3.1, we have assumed that GM takes the wage in each country as given. Suppose that the market wage, w, is unaffected by whatever happens in the auto industry and that workers can easily find a job in the other industries at that wage.
(a) If GM simply pays its workers their opportunity wage of w, then do GM' s workers benefit from, lose from, or remain indifferent to the restructuring of production described in that model (reducing the number of models produced in each country but expanding output at each plant)?
(b) Now, suppose that GM workers are unionized, so that in addition to receiving their opportunity wage they bargain to receive a fraction of the economic rents the company generates. Assume for simplicity that the existence of the union does not affect the firm's output and pricing decisions.8 Call the company's revenues minus the workers' opportunity cost the bargaining surplus, and assume that the workers always receive half of this bargaining surplus (divided up evenly among the workers) in addition to their opportunity wage. Will your answer to the question in (a) be different?
(c) Consider the political incentives of GM workers to support or oppose the Auto Pact and the rationalization of production that it allowed. Will those political incentives be more closely aligned with the political incentives of management if the workers are unionized or if they are not unionized? Explain.
Link to find spreadsheets for questions 4 and 5 below...
https://bcs.wiley.com/he-bcs/Books?action=resource&bcsId=8051&itemId=0470408790&resourceId=31430
4. The spreadsheet "bilateral trade data 2001.xls" records manufacturing trade between the United States and every other country, broken down into 374 industrial categories (all within manufacturing). The "export" column lists exports to the partner country, and the "imports" column lists imports from that country.
Choose a country (other than Canada or Nigeria) and compute the fraction of manufacturing trade with that country that is intra-industry. Briefly analyze your finding. If you came up with a high number, comment on why it is so high; if it is low, comment on why it is so low. A couple of sentences should suffice. If you want to investigate the composition of trade to help in interpreting the data, you can look up the meaning of the industrial categories at https://www.osha. gov/pls/imis/sicsearch.html.
5. The Melitz effect. Open the spreadsheet ''heterogeneous firms.xis." This provides data for a hypothetical monopolistically competitive market with heterogeneous firms. Each firm is numbered from 1 to 100 and has its marginal product of labor ¢ marked. The common value of the fixed labor requirement, f, is marked at the top of the spreadsheet. For each firm, an assumed value for the firm's initial quantity produced is marked as well; assume that this has been derived by setting each firm's marginal cost equal to its marginal revenue. Note that firms with higher marginal products of labor are assumed to produce more output.
(a) Compute each firm's employment of labor under autarky.
(b) Use this information to compute the industry's labor productivity (total output per worker).
(c) Now, suppose that the industry is opened to trade, and in accordance with the Melitz effect, the least efficient 15% of the firms drop out. Furthermore, suppose that firm #54 and all of the firms more efficient than firm #54 export, while the remainder of the surviving firms produce only for the domestic market. Suppose that exporting firms increase their output by 10% compared to autarky, while non-exporters reduce their output by 10% compared to autarky. Now, redo your calculations in parts (a) and (b). Interpret your results. In particular, what happens to industry productivity and why?
(d) Graph the equivalent of Figure 3.4 to illustrate these results.
6. More on the Melitz effect. Using the calculations in the previous problem, you can do an exercise similar in spirit to Trefler (2004). Calculate labor productivity for each firm (once again, output per worker) before and after trade. (Ignore the firms that drop out of the market when trade opens.) Compute the growth rate of labor productivity for each firm, as a percentage.
(a) For how many firms does labor productivity go down? Why does it go down for these firms? For how many does it go up? Why does it go up for these firms?
(b) Now, take the average across firms of the growth rate of labor productivity. Is average productivity growth positive or negative?
(c) Compare your result to the effect on industry productivity computed in the previous problem. Does average firm productivity move in the same direction as industry productivity? If not, then why not?