Global economics Exam

  1. Problems (30 points, 5 points each) – Show your work to get full credit (and partial credit), and always remember to answer why for each question (use 2 decimals).

1. Suppose that:

  • Malaysia requires 1 hour of labor to produce 1 pound of rice and 2 hours of labor to produce 1 pencil;
  • Indonesia requires 2 hours of labor to produce 1 pound of rice and 3 hours of labor to produce 1 pencil;
  • each country has 10,000 hours of labor to allocate between the production of rice and pencils; and
  • in autarky, Malaysia consumes 5,000 pounds of rice and 2,500 pencils.
  • when trade occurs, the international price of rice becomes 3/5 pencils per pound of rice.
  1. In which product will each country specialize? Show how you got to that conclusion following the way we worked with our trade models (show this estimating relative prices and determining which country has a comparative advantage on what)
  2. Explain how should these countries trade and what is the impact of trade for Malaysia (i.e. welfare effect, compare real wages before and after trade). Include the PPF for Malaysia to explain the impact of trade (Here graph rice in horizontal axis and pencils in vertical axis)

2. Suppose that land is specific to corn, capital is specific to automobiles, labor is mobile between sectors, and payments are as follows:

Automobiles: Sales revenue = 200; payments to labor = 100; payments to capital = 100

Corn: Sales revenue = 100; payments to labor = 40; payments to land = 60

Holding the price of automobiles constant, suppose the increase in the price of corn is 20% and the increase in the wage is 10%.

  1. What is the impact of this on the rental of land and the rental of capital? What has happened to the real rental of land? What has happened to the real rental of capital? What has happened to the real income of labor (i.e real wages)?
  2. Show in the PFF how production changes with trade in this example. When graphing your PPF corn should be in the horizontal axis and automobiles in the vertical axis. Also show labor market equilibrium changes with trade. Explain your figures.

Answer the questions below using the information given in the following table.

Revenues and Costs for Two industries (Halloween is just around the corner!)

Candles Pumpkins
Sales Revenue = PcQc = $1000 Sales Revenue = PpQp = $1200
Payments to labor = WLc = $500 Payments to labor = WLp = $400
Payments to capital = RKKc = $500 ΔPc/Pc=0% Payments to capital = RKKp = $800 ΔPp/Pp=10%
  1. What are the changes on the returns to labor and capital? (i.e. estimate percentage changes in W and R, show calculations)
  2. What sector is labor intensive and what sector is capital intensive. Show in a graph how the relative demand for labor changes with trade (and how that affects capital labor ratios). Given this situation, what factor is this country abundant? Who will favor trade and who will be against trade? Why? Explain.
  1. Essays (20 points, 10 points each) – Include any graph/figure if you find it necessary. These essays have many correct answers.

1. Following an Op-Ed writing style (see here a good links on Op-Ed length and how to write an Op-Ed) discuss the evidence on the impact of immigration on wages of all U.S. workers (including foreign-born) by educational level. You can use material from textbook, assigned readings or any other available resource in the internet. Let’s go for a short version, so try to stay in the 400-600 words.

2. Trump and Biden have different views in relation to trade policy towards China. Below there are some links to some sources that discuss these differences. Using the trade theory that we covered in class and the assigned reading, provide a recommendation on how to move forward in relation to trade policy with China. Include 2-3 arguments in your answer where you specifically apply material covered in class to provide support to your recommendation for moving forward in relation to trade policy with China. Discuss also whether your recommendation is similar or different to Trump’s and/or Biden’s approach.


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