trade

International Trade Assignment 1, Semester 1, 2020 Page 1

INTERNATIONAL TRADE ASSIGNMENT 1
SEMESTER 1, 2020

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I. INTRODUCTION

Assume that you are an economic consultant hired by an international
organization/government to provide your expert advice on conditions pertaining to
international trade in Argentina and El Salvador. Your analysis will consist of two
separate reports (one for Assignment 1 and the other for Assignment 2). As an expert,
your job is two-fold:

1. You are required to analyse any relevant issue using your technical skills. This
involves utilizing your knowledge in international trade models as well as
inspecting and interpreting data.

2. You need to communicate your results in an effective way.

The purpose of this exercise is to assess your aptitudes in each domain. You will
evaluate the trading conditions in these countries (Argentina and El Salvador) based on
the scenarios detailed in each question in this Assignment. Your analysis will form the
basis for a short report to the international organization/government body—
summarising your analysis and the associated rationale.

II. DATA SOURCE

For your data analysis, you first need to obtain data from the World Bank (see the link
below) and follow the steps described below. Notice that World Bank regularly updates
its database; therefore it is crucial to obtain all data as soon as possible. The data range
is from 1998 to 2014.

You need to obtain the country-level data for Argentina and El Salvador on:

i. Imports of goods and services (in current US$)
ii. Exports of goods and services (in current US$)

iii. GDP (in current US$)
iv. GDP per capita (in current US$)
v. GINI Index (World Bank estimate) from the World Bank’s World

Development Indicators:
(http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators).

[Note that if your browser (such as Chrome) does not open the web page, try a
different browser (such as Internet Explorer)]

Please DO NOT attach Excel files to the brief. The policy brief needs to be precise
and short. Avoid unnecessary jargon. Your policy brief cannot exceed two pages.

International Trade Assignment 1, Semester 1, 2020 Page 2

III. REQUIRED TASKS

Your tasks involve two dimensions. Firstly, you need to analyse the data (see Steps 1, 2
and 3 in the next section). Secondly, you need to perform a technical analysis by
considering a hypothetical trading environment based on Ricardian model (see Step 4 in
the next section).

Accordingly, you are required to:

 Provide information about how integrated these two countries (Argentina and El
Salvador) are with the rest of the world. To do so, you need to look at their trade
flows relative to their GDP and calculate openness.

 Provide a visual representation of your findings by plotting a graph (use line
graph) that shows the change in openness for these countries over the period
between 1998 and 2014 (including all years, i.e., 1998, 1999, …, 2014).

 Establish whether being integrated with the rest of the world helped these two
countries by looking at the correlation between their openness and GDP per
capita.

 Conjecture what would have happened if these countries were not open to trade
with the rest of the world by evaluating a hypothetical scenario based on a simple
Ricardian model.

IV. REQUIRED STEPS TO COMPLETE EACH TASK

DATA ANALYSIS

For data analysis, you need to follow Steps 1, 2 and 3 given below.

Step 1. Using trade flows in your data, calculate openness as a percentage for
Argentina and El Salvador and present them for each year for both countries as
a table. You need to explain your method, namely, how you calculated
openness using trade flows (write down the formula). In addition, you need to
state what other alternative ways you could have adopted to calculate openness
other than using trade flows.

Step 2. Using the calculations you did for openness in Step 1, plot openness (as a
percentage) against time (1998-2014) for both countries (Argentina and El
Salvador) in a single graph (as a chart type: you are required to use line
graph). Put openness (as a percentage) on the vertical axis and time on the
horizontal axis. Explain and compare briefly how openness changes for these
countries over time. Make sure you limit your explanation to 200 words.

Step 3. Explain in up to 200 words the relationship between openness and economic
development by calculating the correlation coefficient between GDP per capita

International Trade Assignment 1, Semester 1, 2020 Page 3

(proxy for economic development) and openness for each of the two countries,
respectively. [Here you have to use the CORREL command in Excel]. DO
NOT ATTACH YOUR DATA.

TECHNICAL ANALYSIS

For technical analysis, you need to follow Step 4.

Step 4. In order to conjecture the circumstances in these two countries under autarky
(when there is no trade), consider the following hypothetical scenario based on
Ricardian model. Assume throughout that those two countries (Argentina and
El Salvador) are the only two countries in the world, at least for purposes of
trade. There are two goods: Hammers and Widgets. Consumers in both
countries always spend half of their income on Hammers and half of their
income on Widgets. The only factor of production is labour. Each Argentinian
worker can produce 4 Hammers or 2 Widget per unit of time. Each El
Salvadoran worker can produce 2 Hammers or 2 Widgets per unit of time.
There are 50 workers in Argentina and 75 workers in El Salvador. You need to
provide conditions in each country by stating:

a) Which country has an absolute advantage in Hammer? In Widget?

b) Which country has a comparative advantage in Hammer? In Widget?

c) Draw the production possibility frontier for each country and indicate slope
(put Hammer on the vertical axis and Widget on the horizontal axis).

d) Find the autarky relative price of Widgets in both countries (i.e., the price
of Widgets divided by the price of Hammers).

e) What is the optimal consumption and production for each country under
autarky?

V. PRESENTATION OF RESULTS

You need to provide a brief in order to effectively communicate your findings. In your
brief, you must have the following ingredients:

 Micro-credential: Include the URL link that verifies that you successfully
completed the “Fact Check” micro-credential.

 Headline: One possible example is: “A Simple Analysis of Openness for
Argentina and El Salvador: Part I”

 Data Analysis: In this section, you need to present your data analysis based on
your findings in Steps 1, 2 and 3.

 Technical Analysis: In this section, you need to communicate your technical
results based on your findings in Step 4.

Course Name:

International Trade

Course Code: ECON1086

Weight: 25%

Due date: On Friday, March 27, 2020, 11:59 pm (midnight).

Feedback mode: Online

Learning Objectives Assessed: Your technical skills are assessed through the brief you prepare. This involves the way you utilize your knowledge in international trade models as well as your expertise in inspecting and interpreting data.

Micro-credential: Complete the Fact Check micro-credential. You may access this through this Canvas site by clicking ‘Modules’ on the left-hand sidebar and navigating to the Creds module.

The unique URL link is required for submission in this assignment. Please include the URL link in the beginning (first page) of the assessment. Teaching staff will use this link to verify you have successfully completed the Fact Check micro-credential. Use the instructions linked on the credential launch page in Canvas to claim your badge and to get your unique URL.

In order to qualify for a badge you will need to achieve the stated requirements for the credential. Please refer to the credential launch page for more details including marking turnaround times on submission-type assessments. Badges may take up to 24 hours to be issued.

This assessment is linked to the following Course Learning Objectives (CLOs):

· Manipulate economic models to analyse real world issues in international trade.

· Examine international trade data to critically discuss economic theorems and apply in diverse contexts.

· Analyse the fundamental determinants of the size and pattern of trade to verify its determinants and its effects on the wider economy/welfare.

· Compare and contrast economic and political conditions in poor and rich countries to critically assess the incentives and consequences of trade liberalisation globally.

Details
*** Follow the instructions below on how to get the data.
*** Review Lectures on Globalisation and Ricardian model very carefully.

You can reach your assignment here:

Assignment 1

Actions

Instructions for submission:

· Click on Assignments on Canvas.

· Click on Assignment 1.

· On the right-hand corner, click on Submit Assignment.

· Attach your file by clicking on Choose File.

· Once you selected your file containing your assignment, click on Submit Assignment at the bottom.

You can submit more than once. Only your last submission will be graded.

Assessment Declaration:

I declare that in submitting all work for this assessment I have read, understood and agree to the content and expectations of the

Assessment declaration (Links to an external site.)

Rubric

Rubric for Assignment 1

1.0 pts

2.0 pts

1.0 pts

2.0 pts

2.0 Pts

Full marks
Both are correct.

1.0 Pts

1 Point
Only one of them is correct.

0.0 Pts

No marks
None of them is correct.

2.0 pts

1.0 pts

Rubric for Assignment 1

Criteria

Ratings

Pts

This criterion is linked to a learning outcomeHeadline for your brief

1.0 Pts

Full marks
Appropriate and short headline provided.

0.0 Pts

No marks
No headline provided or headline is irrelevant.

1.0 pts

This criterion is linked to a learning outcomeData Analysis (Step 1)

Openness
Calculation

2.0 Pts

Full marks
Correct calculations for both countries.

1.0 Pts

1 Point
Correct calculations for one country only.

0.0 Pts

No marks
Calculations are wrong for both countries.

2.0 pts

This criterion is linked to a learning outcomeData Analysis (Step 1)

Openness
formula

1.0 Pts

Full marks
Formula is correctly stated.

0.5 Pts

0.5 Points
Formula not expressed as a percentage, i.e., not multiplied by 100.

0.0 Pts

No marks
Wrong formula.

This criterion is linked to a learning outcomeData Analysis (Step 1)

Alternative
measures of
Openness

1.0 Pts

Full marks
A plausible alternative is provided.

0.0 Pts

No marks
Alternative provided is not plausible or no alternative is provided.

This criterion is linked to a learning outcomeData Analysis (Step 2)

Graph data
points

1.0 Pts

Full marks
Data points are correct for both countries.

0.5 Pts

1 Point
Data points are correct for one country only.

0.0 Pts

No marks
Data points are wrong for both countries.

This criterion is linked to a learning outcomeData Analysis (Step 2)

Graph Type and Labels

1.0 Pts

Full marks
A single graph is used. All labels are present, and line graph is used as a chart type.

0.5 Pts

0.5 Points
Only one label is present,

0.0 Pts

No marks
No label is present; or a single graph is not used; or line graph is not used.

This criterion is linked to a learning outcomeData Analysis (Step 2)

Explanation of
Trends

2.0 Pts

Full marks
Correct explanation of trends (including comparison) for both countries.

1.0 Pts

1 Point
Correct explanation of trends for only one country; or explanations are incomplete; or no comparison is provided; or explanation is too long (well above 200 words).

0.0 Pts

No marks
Incorrect explanation of trends for both countries.

This criterion is linked to a learning outcomeData Analysis (Step 3)

Calculation of
Correlation
coefficients

2.0 Pts

Full marks
Both correlation coefficients are correct.

1.0 Pts

1 Point
Only one of them is correct.

0.0 Pts

No marks
None is correct.

This criterion is linked to a learning outcomeData Analysis (Step 3)

Economic
Explanation

2.0 Pts

Full marks
Correct economic explanation for both.

1.0 Pts

1 Point
Correct economic explanation for one country only; or explanations are incomplete; or explanation is too long (well above 200 words).

0.0 Pts

No marks
Incorrect explanation for both.

This criterion is linked to a learning outcomeData Analysis (Step 3)

Comparison

1.0 Pts

Full marks
Clearly indicating the country the relationship is stronger.

0.0 Pts

No marks
Not indicating the country for which the relationship is relatively stronger.

This criterion is linked to a learning outcomeTechnical Analysis (Step 4)

Absolute
Advantage

2.0 Pts

Full marks
Both are correct.

1.0 Pts

1 Point
Only one of them is correct.

0.0 Pts

No marks
None of them is correct.

This criterion is linked to a learning outcomeTechnical Analysis (Step 4)

Comparative
Advantage

2.0 Pts

Full marks
Both are correct.

1.0 Pts

1 Point
Only one of them is correct

0.0 Pts

No marks
None of them is correct.

This criterion is linked to a learning outcomeTechnical Analysis (Step 4)

Production
Possibility
Frontier

2.0 Pts

Full marks
Both are correct and clearly labelled, intercepts and slope for each graph is clearly indicated.

1.0 Pts

1 Point
Only one is correct, or they are not clearly labelled or intercepts and slope for any graph is not clearly indicated.

0.0 Pts

No marks
None of them is correct.

This criterion is linked to a learning outcomeTechnical Analysis (Step 4)

Autarky price

This criterion is linked to a learning outcomeTechnical Analysis (Step 4)

Optimal
production and
consumption

2.0 Pts

Full marks
Optimal consumption and production are correct for both countries.

1.0 Pts

1 Point
Optimal consumption and production are correct for only one country.

0.0 Pts

No marks
Optimal consumption and production are incorrect for both countries.

This criterion is linked to a learning outcomeMicro-credential: Fact Check

1.0 Pts

Pass (P)
Evidence of badge presented in assessment. Reflection: Refers to successfully distinguishing between sources on the basis of reliability and also recognising the steps of basic fact verification and will contribute to your data analysis.

0.0 Pts

Fail (NN)
No evidence of badge presented in assessment. Reflection: No reflection on the micro-credential.

Total points: 25.0

Running head: INTERNATIONAL TRADE 1

INTERNATIONAL TRADE 2

International Trade:

Students Name:

Institutional Affiliation:

Professors Name:

Date:

US economy is highly developed and technologically advanced which contributes to more than 81% of its output as there are highly dominated companies in the country which effects its technology financial and service sector in the country. The country mainly exports machinery, mineral fuels and vehicles. UK on the other hand is the sixth largest economic growing nation whose GDP has been note to be growing in the duration given. UK major exports includes machinery, chemicals and some crude materials (Varsakelis, 2001).

Other measures that could be used in measuring the level of globalization includes the tariffs trade, foreign assets and liabilities, economic restrictions, migration and synthetic indicators such as the Ease of Doing Business Index, World Governance Index, Global Enabling Trade Report, and the Human Development Index.

Openness being a measure of degree of integration of the domestic economy to the world economy, it shows the ratio of the trade to GDP as GDP shows the measure of total production of a nation during a given duration which is represented by

Openness= (exports+ imports) ÷GDP

Most trade consists of agricultural commodities and the raw materials prior to the World War 1 but currently it’s shifted to the manufactured goods, consumer goods and the producer goods. The current producers and the manufactures are much more exposed to the international competition and this is due to the spread of the multinational corporations (Gundlach, 1997).

The ease of building of production sites and mobilization of resources including labor in affiliated countries coupled with improvement of telecommunication and transportation gave immense power to these companies development and MNCs become increasingly important in world trade scenario (Rodrik, 1999).

The data of the UK and US trade and the GDP per capita shows a correlation coefficient of 0.9933 for US and 0.3765 for UK. This shows that US has become more and more open as the economy develops through the 1985-2005 period. However the data of UK has shown a weaker correlation between the GDP and the per capita.

From the figure, US is more open than the economy of UK. However both their economies shoed a similar trend in their openness during period 1985-2005. Both the economies become more open as time progress. This is shown from the upward slopping of index of the openness curve above. The openness of USA is more than that of UK and the overall upward trend with the highest and the lowest openness trend as shown in the figures above (Rodrik, 1999).

In general it’s evident that smaller countries have larger index of openness as their trade does not produce wide range of products on their own. Hence the openness measures the importance of the international trade in the national’s economy although this does not give any info on the barriers of trade (Gundlach, 1997).

Several factors may contribute to the driving the openness in this countries, this may include some of the factors that has both positive and negative impacts on the imports and the exports in the country. Technology being an influential factor may contribute to the development of a country to raise its relative openness towards trade. With both UK and US being both developed countries, their impact on technology has been notice and this has been as influential on this countries as they have the required resources that they can employ to maximize their output (Kaushal, et al. 2015).

Another driving force to trade is the potential trade independence as sharing borders with most of the countries gives a country a more advantageous trading center as they would have a higher trading openness as they have easier options on importing and exporting the from the country as this would help them in utilizing the resources and sell them at an optimal price, this would have a positive impact on the tariffs and the trade barriers, while having the purchasing power to import the products. This would create the regulations of what can be imported and exported within the country, so as to impact those traders (Gundlach, 1997).

References

Gundlach, E. (1997). Openness and economic growth in developing countries. Review of World Economics, 133(3), 479-496.

Kaushal, L. A., & Pathak, N. (2015). The causal relationship among economic growth, financial development and trade openness in US economy. International Journal of Economic Perspectives, 9(2), 5-22.

Rodrik, D. (1999). The new global economy and developing countries: making openness work.

Varsakelis, N. C. (2001). The impact of patent protection, economy openness and national culture on R&D investment: a cross-country empirical investigation. Research policy, 30(7), 1059-1068.

US index of oppenness

Column1 1985.0 1986.0 1987.0 1988.0 1989.0 1990.0 1992.0 1993.0 1994.0 1995.0 1996.0 1997.0 1998.0 1999.0 2000.0 2001.0 2002.0 2003.0 2004.0 2005.0 US 1985.0 1986.0 1987.0 1988.0 1989.0 1990.0 1992.0 1993.0 1994.0 1995.0 1996.0 1997.0 1998.0 1999.0 2000.0 2001.0 2002.0 2003.0 2004.0 2005.0 60.0 60.0 62.0 64.0 68.0 71.0 73.0 70.0 75.0 75.0 92.0 105.0 106.0 98.0 110.0 105.0 100.0 106.0 104.0 109.0

Time

index of oppennesss

UK index of oppenness

UK 1985.0 1986.0 1987.0 1988.0 1989.0 1990.0 1992.0 1993.0 1994.0 1995.0 1996.0 1997.0 1998.0 1999.0 2000.0 2001.0 2002.0 2003.0 2004.0 2005.0 50.0 52.0 53.0 54.0 57.0 54.0 57.0 59.0 65.0 60.0 65.0 70.0 82.0 75.0 85.0 86.0 92.0 94.0 95.0 97.0 Column1 1985.0 1986.0 1987.0 1988.0 1989.0 1990.0 1992.0 1993.0 1994.0 1995.0 1996.0 1997.0 1998.0 1999.0 2000.0 2001.0 2002.0 2003.0 2004.0 2005.0

Time

index of oppennesss

Lecturer: Assoc. Prof. Bilgehan Karabay

E-mail: bilgehan.karabay@rmit.edu.au

Textbook:

By John McLaren “International Trade” Wiley
2012.

Main Lecture Slides are provided at the
course webpage in Canvas.

Resources

Assessment
Final 2-hour Examination (plus 15 minutes

reading time): 50%

2 Assignments @ 25% each: 50%

– They are already posted.
– Assignment-1: Due date is on Friday,

March 27th at 11.59pm Melbourne time
– Assignment-2: Due date is on Friday, May

1st at 11.59pm Melbourne time
– More information is on your course

webpage, Canvas.

Provisional Topics
1. Globalization. What do we know?
2. The Ricardian Model
3. Increasing returns to scale (internal), Monopolistic Competition,

Heterogenous Firms
4. Oligopoly Models
5. Specific-Factors (Ricardo-Viner) Model
6. Heckscher-Ohlin Model
7. Tariffs and Quotas under Perfect Competition
8. Protectionism in Practice
9. Increasing returns to scale (external), Infant-industry protection
10. Tariffs and Quotas under Oligopoly
11. Offshoring
12. Immigration

1 A Second Wave of
Globalization
International Trade
John McLaren

A ship loaded with cargo in standardized containers. Containerization has revolutionized
ocean shipping since the 1960s.

1.1 The First Wave

1.2 The Second Wave

1.3 Crisis, Peak Oil, Pirates—and

De-Globalization?

1.4 The Forces at Work

Define GLOBALIZATION
• Anything that facilitates expanded

economic interaction across countries.

• Anything that lowers the costs of
international transactions.

• Includes transactions in goods, services,
factors of production, financial assets.

Key Forms of International Integration
• Rise in trade flows.

• Convergence of international prices.

• Foreign portfolio investment.

• Foreign direct investment (FDI).

• Migrant labor

• Immigration

• Offshoring (aka “outsourcing”)

In other words…
• Integration of goods/services markets.

• Integration of financial markets

• Integration of factor markets (capital plus labor)

Two huge waves of globalization
• 19th century (possibly centered on 1820’s)

• 20th century (after 1970)

19th Century Drivers of Globalization
• Rise of steamship — lowers cost of ocean shipping and

river shipping.

• Suez canal.

• Transatlantic cable — improved communications.

19th Century Evidence
• E.g., O’Rourke and Williamson.

• Evidence on falling shipping costs around 1820’s
(direct evidence).

• Evidence on convergence of product prices around
1820’s (indirect evidence).

The figure shows index of the cost of shipping coal from Britain to export
destinations between 1741-1872, expressed in 1800 (year) shillings per ton.
Both show dramatic reductions in shipping costs after 1820.

Evidence-1: Falling shipping costs (direct evidence).

Evidence-2: Convergence of product prices (indirect evidence).

All three commodities exported from Southeast Asia to Europe. The figure
shows the ratio of price paid by the consumer in Amsterdam to the price
received by the supplier in Southeast Asia between 1580 and 19

. These
ratios fell dramatically after 1820.

However, the first wave of globalization did not last long due
to a wave of protectionist policies in the early twentieth century.

A tariff is a tax on imported good. The average tariff as recorded here
is the total revenue collected from tariffs into the US in a given year
divided by the total value of goods imported.

20th Century Drivers of Globalization
• GATT/WTO multilateral reductions in trade barriers

beginning with end of WWII (undoing early-century
tariffs).

• Loosening of immigration restrictions imposed early
in century.

• Further improvements in communications; internet,
etc.

Liberalization
• The striking reduction in tariffs and other government-

imposed barriers to trade in the second half of the 20th

century is an example of liberalization.

• In general, liberalization denotes any reduction in
barriers to international transactions that are created
by government.

Role of changes in transport
technology

• Hummels (2007) studies trends in transport
costs.

• 1970’s: Containerization revolution.

• Standardized containers can be shipped
worldwide from truck to train to ship, then
back to train and truck.

• However, this does not seem to have caused a
consistent drop in ocean shipping rates: Fuel costs are
still critical, and volatile.

• But air freight rates have dropped dramatically
especially with the introduction of jet engines.

20th Century Evidence
• Rising trade flows.

• Rising importance of FDI.

• Rising share of foreign-born in US labor
force.

Evidence-1: Rising Trade Flows.

Evidence-2: Rising Importance of FDI.

1914 1929/30 1960 1996

US FDI abroad (% of US GDP) Inward FDI in the US (% of US GDP)

Source: Bordo, Irwin and Eichengreen (1999)

Evidence-3: Rising share of foreign-born in U.S. labor force.

Overall message
• First big globalization: 19th century: Seems to have

been driven mainly by technology.

• Second: Late 20th century: Seems to have been driven
mainly by policy.

• Future: Economic crisis plus rising fuel costs could
lead to another de-globalization. We’ll see.

Recent Trends
• In the first quarter of 2009, world trade fell by a

startling 30% as the world economy entered a major
downturn.

• Given the historical trends, it is worth asking what the
future long-run trends in globalization may be, and
whether or not the decades-long trend toward
international integration may be reversed.

Some Key Factors
• Trade may become more volatile.

• Peak Oil.

• A new rise of protectionism?

• Global warming.

What is the reason for all of this
international activity?
The following questions come to mind:

• Why trade?

• Why build a company through investment abroad?

• Why offshore jobs?

• Why emigrate?

• What is the driving force behind all of these big economic
changes described above?

• What are the effects of all of this globalization?

Beyond the trends: Why do countries
trade?
• Answer that question and you have a theory of trade.

• Different answers to that question imply different
theories of trade, with different policy implications.

• There are three main theories, and we’ll go through
each.

Reasons for trade
1. Differences between countries (e.g., technology,

productivities): Comparative advantage.

2. Increasing returns to scale.

3. Imperfect competition.

These give rise to the three branches of the family tree of
trade theory.

Where we are

Comparative advantage:

Countries are different, and any difference between two countries
– in technology, climate, culture, factor proportions, consumer
preferences, for example – can lead to opportunities for mutual
gains from trade. Theories based on this reasoning are called
comparative advantage theories.

Increasing Returns to Scale:

Many industries exhibit increasing returns to scale which can
imply that it is most efficient and most profitable to concentrate
production of a good in one location, serving all world markets
from that location.

Imperfect Competition:

Many industries are oligopolistic in nature, and trade can
arise purely as a result of that, as oligopolists strive to grab
oligopolistic rents from each other by invading each others’
markets.

Some basic definitions
Imports: the purchase of goods and services from another country.

Exports: the sale of goods and services to other countries.

Merchandise goods: includes manufacturing, mining and
agricultural products.

Service exports: includes business services like eBay, travel and
transportation.

Migration: The flow of people across borders as they move
from one country to another.

Foreign Direct Investment (FDI): The flow of capital across
borders when a firm owns a company (at least 10% acc. to
OECD definition) in another country. Two ways FDI can
occur:

Horizontal FDI: When a firm from one industrial country
owns a company in another industrial country, e.g., FDI
between Europe and U.S.

Vertical FDI: When a firm from an industrial country owns a
plant in a developing country, e.g., FDI in China by U.S.
firms.

Reasons for Horizontal FDI
 Having a plant abroad allows the parent firm to avoid any

tariffs or quotas from exporting to a foreign market since it
produces locally.

 Having a foreign subsidiary abroad also provides improved
access to that economy because the local firms will have
better facilities and information for marketing products.

 An alliance between the production divisions of firms allows
technical expertise to be shared.

Reasons for Vertical FDI
• This usually occurs to take advantage of lower wages

in the developing country.

• Also to avoid tariffs and acquire local partners to sell
there.

There is also what we call as “Reverse-vertical FDI”.

Reverse-vertical FDI: Companies from developing countries
buying firms in industrial countries, e.g., FDI in U.S. by
Chinese firms.

Reason: They are acquiring the technological knowledge of
those firms in industrial countries to combine with low wages
in home country.

Trade Balance: The difference between the total value of
exports (of goods and services) and the total value of imports
(of goods and services).

Trade Surplus: when exports > imports

Trade Deficit: when imports > exports

Bilateral Trade Balance: The difference between exports and
imports between two countries.

In this course, for simplification we will assume that trade is
balanced, i.e., exports = imports.

What are the problems with bilateral trade data?

If some of the inputs are imported into the country, then the
value-added is less than the value of exports.

Example: Barbie Doll. It is valued at $2 when it leaves China
but only 35 cents is value-added from Chinese labor. The
whole $2 is counted as an export from China to the U.S. even
though only 35 cents of it really comes from China through
their labor contribution. As a result, trade statistics can be
misleading.

Trade Barriers: All factors that influence the amount of goods
and services shipped across international borders, such as:

Import Tariffs: Taxes that countries charge on imported
goods.

Import Quotas: Limitations on the quantity of an imported
good.

Transportation costs

Other events, such as wars.

Some facts
• Migration across countries is not as free as the

flow of goods and countries fear the effect of
immigration on domestic labor markets.

• FDI is largely unrestricted in industrial countries
but faces some restrictions in developing countries.

• A large portion of international trade is between
industrial countries.

• Larger countries tend to have smaller shares of
trade relative to GDP since much of their trade is
internal.

• The majority of world migration occurs into
developing countries as a result of restrictions on
migration into industrial countries.

• International trade in goods and services acts as a
substitute for migration.

• The majority of world flows of FDI occurs
between industrial countries.

2 Should Nigeria Strive for Self-Sufficiency in Food?

International Trade

John McLaren

2.1 A Presidential Agenda
2.2 The Comparative Advantage Argument Formalized: Introducing the Ricardian Model
2.3 Autarky in the Ricardian Model
2.4 Free Trade in the Ricardian Model
2.5 So What Actually Happened?
2.6 Additional Insights from Ricardo’s Model

Most countries are net food importers.
Particularly true of lower-income countries.
i.e., “dependent on world market for food”
Many commentators view this as a problem per se:
Leads to call for self-sufficiency in food.

E.g., Nigeria
Approximately 80% “self-sufficiency ratio” in cereals.
Pres. Obasanjo (1999-2007) outspoken booster of the idea.

Ways in which Nigeria has pushed toward food self-sufficiency.
Loans to farmers.
Subsidized inputs.
Underwriting agricultural research — new crop hybrids.
Tightly restricting, even banning, cereals imports.
E.g., rice and wheat import ban, 1986-95.

Arguments for import ban?
Possible national security/international bargaining power argument in some cases.
E.g. Risk of siege, boycott, blockade.
Perhaps applicable to medieval city states; Cuba; Former Soviet Union; 19th century Hawaii.
Probably not relevant to Nigeria.

Arguments against.
Biggest one: Comparative advantage.
Import ban could harm Nigerian food security by depressing real income.
Idea: Prevents benefits of specializing in what farmers can produce most efficiently.

We will first examine comparative advantage
models in detail.
According to these type of models, countries are
different, and any difference between two
countries – in technology, climate, culture,
factor proportions, consumer preferences, for
example – can lead to opportunities for mutual
gain from trade.
8

In order to formalize the comparative advantage
argument, we will use the classic formulation by 19th
century British economist David Ricardo.
According to the Ricardian model, technological differences across countries is the reason for trade.
Before analyzing it in more detail, let’s see some brief
history of how this theory is developed.
9

2. Brief History
The Mercantilists
Mercantilism: was the dominant attitude toward international trade in the 17th and 18th centuries.
Gold and silver served as money.
Symbolized a nation’s wealth.
Nations encouraged exports and restricted imports as a method to improve inflow of gold and silver
Mercantilists assumed trade was a zero-sum game (like a poker).
Meaning: It could not be mutually beneficial to all parties.
10

Absolute Advantage
Definition: A country has an absolute advantage in a commodity if its workers are more productive in producing that commodity than workers in the other country.
Adam Smith (1776) ‘The Wealth of Nations’
By assuming that each country could produce some commodities using less labor than its trading partners, he showed that all parties could benefit
Trade improved the allocation of labor, ensuring that each good would be produced in the country where the good’s production required the least labor.
Result would be a larger total quantity of goods produced in the world.
Trade would be a positive-sum game.

Comparative Advantage
Definition: A country has a comparative advantage in a commodity if its opportunity cost in producing that commodity is lower than the other country’s.
Opportunity Cost (of commodity-1): The amount of commodity-2 that must be given up in order to obtain one additional unit of commodity-1.
David Ricardo (1817) ‘Principles of Political Economy and Taxation’

Illustrated that trade’s potential benefits to the world were more than even Adam Smith imagined
Paul Samuelson: ‘Comparative advantage is the best example of an economic principle that is undeniably true yet not obvious to intelligent people’
So, if you understand it by the end of this chapter – you have come a long way in your study of international trade!
12

Understanding the comparative advantage argument: the Ricardian model.
Two countries: ‘Nigeria’ and ‘America’ (North + South).
Two goods: Rice and cocoa.
130 million people in Nigeria and 390 million people in America (everyone is a farmer).
1 farmer in one season in Nigeria can produce 1 unit of rice or 3 units of cocoa.
1 farmer in one season in American can produce 2/3 units of rice or of cocoa.

Not a realistic picture of either economy.
We’re ignoring Nigeria’s oil, for example.
But the point we’re making would emerge in a much more complicated, realistic model as well.

Opportunity cost.
Opportunity cost of producing rice in Nigeria is 3 units of cocoa.
Opportunity cost of producing rice in America is 1 unit of cocoa.
Opportunity cost of producing cocoa in Nigeria is 1/3 units of rice.
Opportunity cost of producing cocoa in America is 1 unit of rice.

Important (though obvious) observation:
In each country, the opportunity cost of one good is the reciprocal of the opportunity cost of the other good.

Comparative advantage defined.
The country with the lowest opportunity cost of producing a good has a comparative advantage in that good.
Therefore, Nigeria has a comparative advantage in …..
….cocoa.
and a comparative disadvantage in ….
….rice.

Crucially important (if obvious) observation:
A country must have a comparative advantage in something.
A country can’t have a comparative advantage in both goods.
Due to the reciprocal property of opportunity costs.

Contrast with absolute advantage.
A country has an absolute advantage in a good if its workers are more productive in producing it.
Who has an AA here, in what?
Yes, Nigeria and in both goods!
Note: A country certainly can have an AA in both goods, or an absolute disadvantage in both goods.

To anticipate:
We’ll see that comparative advantage is what determines the pattern of trade.
Absolute advantage has no importance at all for the pattern of trade.
But absolute advantage is important for the international distribution of income.

Notion of autarky.
In this model, banning rice imports is effectively the same as shutting down trade completely.
This is a thought experiment called “autarky.”
Comparing autarky with free trade allows us to analyze what trade does.
First, we’ll analyze autarky, then trade, and compare the two.

Autarky equilibrium.
First, look at supply behavior: Relative supply of rice (quantity of rice)/(quantity of cocoa).
As a function of relative price of rice (price of rice)/(price of cocoa).
Gives RS curve.

then all Nigerian farmers will
produce cocoa. In other words:

Next, need relative demand.
Assume that every consumer spends half of her income on rice and half on cocoa.
Equivalently — Cobb-Douglas utility function with equal weights on the two goods.
This implies that (quantity of rice demanded)/(quantity of cocoa demanded) = 1/(relative price of rice).
This gives the RD curve.

Autarky equilibrium.
In autarky, RS must equal RD in each country.
Yields relative price of rice = 3 in Nigeria.

Budget line for Nigerian farmer.
Income equals 3 times price of cocoa, or 1 times price of rice (per growing season).
Cocoa-axis intercept = income/price of cocoa = 3.
Rice-axis intercept = income/price of rice = 1.
Analysis for America is parallel.

Free trade.
Now, assume that there are no impediments to trade between the two countries.
No tariffs or transport costs: One world price of rice, one world price of cocoa.
Now, we need the world RS curve and RD curve.
The RD curve is easy, since it’s the same as before. Now for the RS curve.

What does trade do to human well-being?
Can tell by looking at budget lines, before and after trade.

The effects of trade: Nigeria

The effects of trade: America

Important point about trade:
Utility of all consumers in both countries is higher under trade.
Higher real incomes due to efficiency benefits of specialization along the lines of comparative advantage.
EVEN nutrition is better in Nigeria, although it loses its cereals sector.
(Food self-sufficiency is now 0%, but they eat better.)

What has happened to food consumption in Nigeria?
Budget line has shifted out: Positive income effect
Since rice is a normal good, this pushes for a rise in rice consumption.
Relative price of rice has fallen: Substitution effect.
This also calls for a rise in rice consumption.

Therefore:
— although Nigeria has lost its rice sector entirely,
Nigerians eat more rice and are better nourished.

So what actually happened?
Period of ban was 1986-95.
Part of Nigeria’s Structural Adjustment Program.
One observation: Huge increase in consumer prices for food.
Food consumption and nutrition: More complicated.

Does this mean the import ban improved nutrition?
Note: danger of post-hoc reasoning.
“A happened; then B happened; therefore A caused B.”
In our case, “The government banned rice imports and then nutrition improved – therefore, rice import bans improve nutrition,” is a post-hoc reasoning.
Many other things were going on at the same time.

Other (more likely) explanations:
Macroeconomic recovery.
Improvement in literacy.
Government programs to help small farmers.
Huge improvement in productivity in cassava (an important root crop).

Question of interest is the counterfactual:
What would have happened to nutrition if everything else had happened as it did but the cereal ban had not occurred?

Bottom line for exercise:
Comparative advantage provides huge argument for allowing countries to specialize in response trade.
Strong argument against national self-sufficiency (in food or anything else).

Where We Are

Another Example
Assumptions
Two countries:
Home (denoted by H)
Foreign (denoted by F)

Two goods:
Wheat (denoted by W)
Cloth (denoted by C)

Environment: Perfect competition prevails
Implies that price of each good will equal its marginal cost of production.
Marginal cost: The change in total cost that is due to the production of one additional unit of output.
Transportation costs are zero.
Any barriers to global trade are ignored.
57

Preferences
Assume that every consumer in each country has identical preferences and spends half of her income on wheat and half on cloth.
Equivalently — Cobb-Douglas utility function with equal weights on the two goods:

Hence:

Production Technology
Labor is the only factor of production.
Each country has a fixed amount of labor available, which is fully employed and homogeneous within the country.
Labor is completely mobile among industries within each country and completely immobile between countries.
Total labor supply available at home: L = 25
Total labor supply available at foreign: L* = 75

In Home: One worker can produce 4 bushels of wheat or 2 yards of cloth.
In Foreign: One worker can produce one bushel of wheat or one yard of cloth.
The Marginal Product of Labor is the extra output obtained by using one more unit of labor.
In Home: MPLW = 4, MPLC = 2
In Foreign: MPL*W = 1, MPL*C = 1
60

Opportunity Cost
Opportunity cost of producing Wheat in Home is ? yard of Cloth.
Opportunity cost of producing Wheat in Foreign is ? yard of Cloth.
Opportunity cost of producing Cloth in Home is ? bushels of Wheat.
Opportunity cost of producing Cloth in Foreign is ? bushel of Wheat.
61

Comparative advantage
Therefore, Home has a comparative advantage in …..
….Wheat.
and a comparative disadvantage in ….
….Cloth.
62

Contrast with absolute advantage.
Who has an AA here, in what?
? has an absolute advantage in Wheat.
? has an absolute advantage in Cloth.

63
Home
Home

Autarky equilibrium
First, look at supply behavior: Relative supply of wheat:
(quantity of wheat)/(quantity of cloth).
As a function of relative price of wheat:
(price of wheat)/(price of cloth).
Gives Relative Supply (RS) curve.
64

65
then all Home workers will
If 2PW < PC produce cloth. In other words: then workers are indifferent. 65 66 RSH 66 Next, need relative demand. We know that This implies that (quantity of wheat demanded)/(quantity of cloth demanded) = 1/(relative price of wheat) In other words: This gives the Relative Demand (RD) curve. 67 67 68 RD Note that this curve is rectangular hyperbola 68 Autarky equilibrium. In autarky, RS must equal RD in each country. Yields relative price of wheat = ? in Home. 69 69 70 RSH RD Autarky equilibrium in Home 70 71 Home worker’s autarkic budget line Cloth, QC Wheat, QW 2 4 1 2 Budget line Indifference curves 71 The tangency of the home worker’s budget line and the home worker’s indifference curve gives us how much each worker in autarky consumes from each commodity. Since each worker is identical and there are 25 workers in Home, the total production and consumption of cloth and wheat are given by: 72 72 73 RSH RD Autarky equilibrium in Home 73 74 RSF RD Autarky equilibrium in Foreign 1 74 75 Foreign worker’s autarkic budget line Cloth, QC Wheat, QW 1 1 Indifference curves Budget line 75 What is the total production and (therefore) consumption of cloth and wheat in Foreign under autarky? 76 76 77 RSF RD Autarky equilibrium in Foreign 1 77 Free Trade Now, assume that there are no impediments to trade between the two countries. No tariffs or transport costs: One world price of wheat, one world price of cloth. Now, we need the world RS curve and RD curve. The RD curve is easy, since it’s the same as before (since each consumer = worker in both countries has the same preferences by assumption-4). Now for the RS curve. 78 78 79 RSWorld 1 79 80 RSWorld 1 Both countries produce only Cloth 80 81 1 Home produces Wheat Foreign produces Cloth RSWorld 81 82 RSWorld 1 Both countries produce only Wheat 82 83 RSWorld 1 RD Free Trade Equilibrium 83 84 Effect of Trade on Home worker Cloth, QC Wheat, QW 2 4 1 2 3 1.5 Income (which is 4*PW) divided by the price of cloth (which is PC): 84 85 Effect of Trade on Foreign worker Cloth, QC Wheat, QW 1 1 Income (which is PC) divided by the price of wheat (which is PW): 85 Additional Insights: The role of absolute advantage Absolute advantage has NO ROLE AT ALL in determining the pattern of trade. On the other hand, absolute advantage determines the international distribution of income (= wage in this case). Home real wage is given by: 4 bushels of wheat or Foreign real wage is given by: 1 yard of cloth or 86 Hence, home workers earn more than foreign workers as measured by their ability to purchase either good. This fact reflects Home’s absolute advantage in the production of both goods. 87 The effect of size differences Suppose that we increase the size of foreign work force from L* = 75 to L* = 80 . As we do so, the maximum amount of cloth that the foreign economy can produce increases. As a result, the world relative supply curve (and thus the free trade equilibrium) changes as follows: 88 89 1 RD RSWorld RSWorld Terms of Trade (ToT): The price of a country’s exports divided by the price of its imports. So, ? represents Home’s ToT, whereas ? represents Foreign’s ToT. A general feature of Ricardian models: Small countries capture most of the gains from trade. 90 Possibilities for Immigration So far, we have assumed that labor is immobile between countries. However, if we relax this assumption (so that we allow workers to move across borders to chase higher income), all of the labor movement will be in the direction of the country with the higher productivity (since income is higher). In our case, this implies: Workers will move from Foreign to Home. Therefore, although comparative advantage governs the direction of trade, in this model if immigration became possible, absolute advantage would govern the pattern of immigration. 91 2 1 2 1 ) , ( C W C W U = . , 2 2 income is I where P I Q and P I Q C D C W D W = = 1 2 2 1 , 2 1 < C W P P If , 2 1 >
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Lecturer: Assoc. Prof. Bilgehan Karabay

E-mail: bilgehan.karabay@rmit.edu.au

Textbook:
By John McLaren “International Trade” Wiley 2012.
Main Lecture Slides are provided at the course webpage in Canvas.

Resources
2

Assessment
Final 2-hour Examination (plus 15 minutes reading time): 50%
2 Assignments @ 25% each: 50%
They are already posted.
Assignment-1: Due date is on Friday, March 27th at 11.59pm Melbourne time
Assignment-2: Due date is on Friday, May 1st at 11.59pm Melbourne time
More information is on your course webpage, Canvas.

Provisional Topics
Globalization. What do we know?
The Ricardian Model
Increasing returns to scale (internal), Monopolistic Competition, Heterogenous Firms
Oligopoly Models
Specific-Factors (Ricardo-Viner) Model
Heckscher-Ohlin Model
Tariffs and Quotas under Perfect Competition
Protectionism in Practice
Increasing returns to scale (external), Infant-industry protection
Tariffs and Quotas under Oligopoly
Offshoring
Immigration
4

1 A Second Wave of Globalization
International Trade
John McLaren

A ship loaded with cargo in standardized containers. Containerization has revolutionized ocean shipping since the 1960s.

1.1 The First Wave
1.2 The Second Wave
1.3 Crisis, Peak Oil, Pirates—and De-Globalization?
1.4 The Forces at Work

Define GLOBALIZATION
Anything that facilitates expanded economic interaction across countries.
Anything that lowers the costs of international transactions.
Includes transactions in goods, services, factors of production, financial assets.

Key Forms of International Integration
Rise in trade flows.
Convergence of international prices.
Foreign portfolio investment.
Foreign direct investment (FDI).
Migrant labor
Immigration
Offshoring (aka “outsourcing”)

In other words…
Integration of goods/services markets.
Integration of financial markets
Integration of factor markets (capital plus labor)

Two huge waves of globalization
19th century (possibly centered on 1820’s)
20th century (after 1970)

19th Century Drivers of Globalization
Rise of steamship — lowers cost of ocean shipping and river shipping.
Suez canal.
Transatlantic cable — improved communications.

19th Century Evidence
E.g., O’Rourke and Williamson.
Evidence on falling shipping costs around 1820’s (direct evidence).
Evidence on convergence of product prices around 1820’s (indirect evidence).

Evidence-2: Convergence of product prices (indirect evidence).
All three commodities exported from Southeast Asia to Europe. The figure
shows the ratio of price paid by the consumer in Amsterdam to the price
received by the supplier in Southeast Asia between 1580 and 1939. These
ratios fell dramatically after 1820.

However, the first wave of globalization did not last long due
to a wave of protectionist policies in the early twentieth century.
A tariff is a tax on imported good. The average tariff as recorded here
is the total revenue collected from tariffs into the US in a given year
divided by the total value of goods imported.

20th Century Drivers of Globalization
GATT/WTO multilateral reductions in trade barriers beginning with end of WWII (undoing early-century tariffs).
Loosening of immigration restrictions imposed early in century.
Further improvements in communications; internet, etc.

Liberalization
The striking reduction in tariffs and other government-imposed barriers to trade in the second half of the 20th century is an example of liberalization.
In general, liberalization denotes any reduction in barriers to international transactions that are created by government.

Role of changes in transport technology
Hummels (2007) studies trends in transport costs.
1970’s: Containerization revolution.
Standardized containers can be shipped worldwide from truck to train to ship, then back to train and truck.

However, this does not seem to have caused a consistent drop in ocean shipping rates: Fuel costs are still critical, and volatile.
But air freight rates have dropped dramatically especially with the introduction of jet engines.

20th Century Evidence
Rising trade flows.
Rising importance of FDI.
Rising share of foreign-born in US labor force.

Evidence-1: Rising Trade Flows.

Evidence-2: Rising Importance of FDI.

Source: Bordo, Irwin and Eichengreen (1999)

Evidence-3: Rising share of foreign-born in U.S. labor force.

Overall message
First big globalization: 19th century: Seems to have been driven mainly by technology.
Second: Late 20th century: Seems to have been driven mainly by policy.
Future: Economic crisis plus rising fuel costs could lead to another de-globalization. We’ll see.

Recent Trends
In the first quarter of 2009, world trade fell by a startling 30% as the world economy entered a major downturn.
Given the historical trends, it is worth asking what the future long-run trends in globalization may be, and whether or not the decades-long trend toward international integration may be reversed.

Some Key Factors
Trade may become more volatile.
Peak Oil.
A new rise of protectionism?
Global warming.

What is the reason for all of this international activity?
The following questions come to mind:
Why trade?
Why build a company through investment abroad?
Why offshore jobs?
Why emigrate?
What is the driving force behind all of these big economic changes described above?
What are the effects of all of this globalization?
28

Beyond the trends: Why do countries trade?
Answer that question and you have a theory of trade.
Different answers to that question imply different theories of trade, with different policy implications.
There are three main theories, and we’ll go through each.

Reasons for trade
Differences between countries (e.g., technology, productivities): Comparative advantage.
Increasing returns to scale.
Imperfect competition.
These give rise to the three branches of the family tree of trade theory.

Where we are

Comparative advantage:
Countries are different, and any difference between two countries – in technology, climate, culture, factor proportions, consumer preferences, for example – can lead to opportunities for mutual gains from trade. Theories based on this reasoning are called comparative advantage theories.
32

Increasing Returns to Scale:
Many industries exhibit increasing returns to scale which can imply that it is most efficient and most profitable to concentrate production of a good in one location, serving all world markets from that location.
33

Imperfect Competition:
Many industries are oligopolistic in nature, and trade can arise purely as a result of that, as oligopolists strive to grab oligopolistic rents from each other by invading each others’ markets.
34

Some basic definitions
Imports: the purchase of goods and services from another country.
Exports: the sale of goods and services to other countries.
Merchandise goods: includes manufacturing, mining and agricultural products.
Service exports: includes business services like eBay, travel and transportation.

Migration: The flow of people across borders as they move from one country to another.
Foreign Direct Investment (FDI): The flow of capital across borders when a firm owns a company (at least 10% acc. to OECD definition) in another country. Two ways FDI can occur:
Horizontal FDI: When a firm from one industrial country owns a company in another industrial country, e.g., FDI between Europe and U.S.
Vertical FDI: When a firm from an industrial country owns a plant in a developing country, e.g., FDI in China by U.S. firms.
36

Reasons for Horizontal FDI
Having a plant abroad allows the parent firm to avoid any tariffs or quotas from exporting to a foreign market since it produces locally.
Having a foreign subsidiary abroad also provides improved access to that economy because the local firms will have better facilities and information for marketing products.
An alliance between the production divisions of firms allows technical expertise to be shared.
37

Reasons for Vertical FDI
This usually occurs to take advantage of lower wages in the developing country.
Also to avoid tariffs and acquire local partners to sell there.
38

There is also what we call as “Reverse-vertical FDI”.
Reverse-vertical FDI: Companies from developing countries buying firms in industrial countries, e.g., FDI in U.S. by Chinese firms.
Reason: They are acquiring the technological knowledge of those firms in industrial countries to combine with low wages in home country.
39

Trade Balance: The difference between the total value of exports (of goods and services) and the total value of imports (of goods and services).
Trade Surplus: when exports > imports
Trade Deficit: when imports > exports
Bilateral Trade Balance: The difference between exports and imports between two countries.
In this course, for simplification we will assume that trade is balanced, i.e., exports = imports.

What are the problems with bilateral trade data?
If some of the inputs are imported into the country, then the value-added is less than the value of exports.
Example: Barbie Doll. It is valued at $2 when it leaves China but only 35 cents is value-added from Chinese labor. The whole $2 is counted as an export from China to the U.S. even though only 35 cents of it really comes from China through their labor contribution. As a result, trade statistics can be misleading.
41

Trade Barriers: All factors that influence the amount of goods and services shipped across international borders, such as:
Import Tariffs: Taxes that countries charge on imported goods.
Import Quotas: Limitations on the quantity of an imported good.
Transportation costs
Other events, such as wars.
42

Some facts
Migration across countries is not as free as the flow of goods and countries fear the effect of immigration on domestic labor markets.
FDI is largely unrestricted in industrial countries but faces some restrictions in developing countries.
A large portion of international trade is between industrial countries.

Larger countries tend to have smaller shares of trade relative to GDP since much of their trade is internal.
The majority of world migration occurs into developing countries as a result of restrictions on migration into industrial countries.
International trade in goods and services acts as a substitute for migration.
The majority of world flows of FDI occurs between industrial countries.
44

00
05
10
15
20
25
19141929/3019601996
US FDI abroad (% of US GDP)Inward FDI in the US (% of US GDP)

4 Trade and Large Corporations: Kodak versus Fuji

International Trade

John McLaren

A company with global reach: A shop advertises “Kodak products” in the town of Safranbolu, Turkey.

4.1 Big Players in the Game of Trade
4.2 Background on Kodak, Fuji, and the War
4.3 Introducing Oligopoly
4.4 Autarky
4.5 Trade
4.6 Winners and Losers
4.7 Some Other Possibilities

Question: Is trade rigged in favor of large multinationals?
Common undercurrent of anti-globalization rhetoric.
But Kodak thinks they’re a victim of globalization.

Market for photographic film.
Two dominant players worldwide: Kodak and Fujifilm.
Kodak was the pioneer — early 20th century.
Fujifilm was the upstart — 1930’s.

Globalization in film.
Mid-century to 1970’s: Very little trade in film between US and Japan.
1970’s: Japanese import, FDI restrictions eased up.
Fujifilm opened a US subsidiary: Intense advertising, PR, sports promotion.
1985: Kodak opened a Japanese marketing subsidiary.

Salient facts.
Essentially a duopoly.
Long period of effective autarky in the film market.
Now, much trade both ways, but each firm’s share in its home market is much bigger than the other firm’s.
For most purposes, the two products are essentially the same.

So — what’s the effect of trade on an oligopolistic industry?
We’ll examine by integrating an oligopoly model into trade.
Use ‘Cournot’ approach: Competition in quantities.
Simple, stylized model, but we’ll try to tailor it to fit Kodak and Fuji as much as possible.

The model.
One producer of film in Japan, one in the US.
No possibility of Entry.
Demand curve is the same in both countries:
Q = (1/2)(11 – P)108

Production technology is identical: MC = $4.00 per roll.
Under autarky, Kodak is a monopolist in the US; Fuji is a monopolist in Japan.
Inverse demand: P = 11 – 2×10-8Q
Implies marginal revenue: MR = 11 – 4×10-8Q
Set equal to MC and go.

Now, allow for trade.
Assume that either firm must pay $2.00 in transport/transaction costs/tariff to ship to the other country.
(If you don’t have that, they share each market equally — unrealistic.)
Now, they’ll compete in each market.
Need to make a psychological assumption: What does Kodak expect Fujifilm to do?

We’ll assume that:
The two firms move simultaneously.
Each firm makes a guess about the other’s quantity sold in both markets.
Given that guess, the firm chooses its own quantity optimally, understanding how prices will adjust.
AND: both firms’ guesses are correct.
Cournot equilibrium.

Kodak sells qUSK in the US and qJK in Japan.
Fujifilm sells qUSF in the US and qJF in Japan.
Kodak makes a guess about the value of qUSF : hold that fixed for now.

Kodak’s demand in the US is then:
P = 11 – 2×10-8(QUS)
P = 11 – 2×10-8(qUSK + qUSF)
P = [11 – 2×10-8qUSF ] – 2×10-8qUSK
Kodak’s MR curve in the US is then:
MR = [11 – 2×10-8qUSF ] – 4×10-8qUSK

Fix a value of qUSF.
Get the MR that implies for Kodak.
Set MR = MC = $4 per roll.
This gives qUSK as a function of qUSF: Kodak’s reaction function.

MR = [11 – 2×10-8qUSF ] – 4×10-8qUSK
= $4.00
Implies qUSK = 1.75×108 – (1/2)qUSF.

Do same thing for Fujifilm:
Fix qUSK; get Fujifilm’s MR in the US.
Set equal to Fujifilm’s MC in the US:
$4.00 + $2.00 = $6.00.
This gives qUSF as a function of qUSK:
qUSF = 1.25×108 – (1/2)qUSK.

Now, put these two pieces together.
Cournot equilibrium is a pair of quantity choices on both reaction functions simultaneously.
Intersection of the two lines.

Compare trade equilibrium with autarky.

Trade lowers Kodak’s sales in the US, but now allows Fuji sales in the US.
Overall effect on quantity of film sold in the US?
Quantity goes up (and therefore price goes down).
Reason: We’re moving along Kodak’s reaction function, whose slope is greater than 1.

So 1/4 of world output of film is traded in equilibrium.
Question: Would there be trade if we didn’t have imperfect competition?
No: PUS and PJ would both be equal to the common marginal cost of $4.00.
No motive to incur the transport cost to export.
Thus oligopoly itself is the reason for trade.

Now, the welfare effects of trade.

Consumers of film clearly benefit from trade.
Effect on Kodak profit: Some new sales; lower profit margin on existing sales.
But Kodak’s profits unambiguously fall.
Could have sold 200 million rolls at $7.00 under autarky, but chose not to, because 175 million at $7.50 was more profitable.
It’s even less profitable with the extra transport cost.

In this case, Kodak’s loss is greater than consumers’ gain, so US social welfare falls as a result of trade.
I.e., D > B+C.

Welfare effects of trade have two elements.
I. Society gains from increased competition.
Price is pushed closer to MC.
Deadweight loss from monopoly is attenuated.

Welfare effects of trade have two elements.
II. Society loses from redundant transport costs.
Costly two-way shipments of identical film are per se wasteful.
Example of rent-seeking: Each firm is using some real resources for the purpose of grabbing some of the other firm’s oligopolistic rent.
Net effect on welfare could go either way.

How about the big question: Do the large corporations capture most of the gains from globalization?
No — in this case, everyone gains from globalization except the large corporations.
This is the competition effect.
Note the difference with monopolistic competition.

Some variations on the basic model.
I. No transport costs.
II. Asymmetric oligopoly.
III. Product differentiation.
IV. Competition in prices.

I. The case without transport costs.
Assume same model, except that transport costs = 0.
Then both firms have the same reaction function in both markets.
Market shares = 50%.
Effect of trade on welfare in each country?

I. The case without transport costs.
Effect of trade on welfare in each country?
POSITIVE. Area D disappears. Only competition effect remains.
Conclude that if transport costs are low enough, both countries gain from trade.

II. Asymmetric oligopoly.
Actual experience in the film industry suggests Fujifilm might have an advantage over Kodak in some ways.
Suppose, for concreteness, that the model is as before;
Fujifilm’s transport cost for selling in the US still = $2.00;
but Kodak’s transport cost for serving Japanese consumers is prohibitively high.

II. Asymmetric oligopoly.
Now, equilibrium in Japan is the same as under autarky;
Equilibrium in the US is the same as in the main model with trade.
Fujifilm gets its autarky profit plus some foreign profits;
Kodak gets its free-trade profits minus the foreign profits.

II. Asymmetric oligopoly.
Result: Japan gains from trade; the US does not.
The reason is that trade facilitates the transfer of profits from Kodak to Fujifilm.

III. Product Differentiation.
If Kodak film and Fuji film were two different products, it would be more likely that:
(i) The two corporations would benefit from trade.
(ii) The two societies would benefit from trade.

III. Product Differentiation.
Two big reasons:
(i) The competition effect would be weaker.
(ii) Consumers would now benefit from a rise in product diversity due to trade.

IV. Price competition.
Suppose that the two firms compete in prices.
I.e., Kodak tries to guess what price Fujifilm will charge in both markets;
chooses its optimal price accordingly, understanding how quantities will adjust;
and each firm’s guess is correct.
This is called Bertrand competition.

IV. Price competition.
In this model, that yields a price of $6.00 in both markets (to within a penny).
Proof. Suppose that in equilibrium, PKUS > $6.01.
Then, Fujifilm can grab the whole US market profitably by charging PKUS minus $0.01.
Thus, PFUS = PKUS – $0.01.
But then Kodak will optimally set its price $0.01 below PFUS. Contradiction.

IV. Price competition.
Outcome: PUS = PJ = $6.00.
No trade: Outside firm is just barely priced out of the market.
Once again, consumers benefit from competition effect, and oligopolists lose.
In this case, the net effect is guaranteed to be positive.

Main lessons.
Oligopoly is a reason for trade in and of itself.
To the extent that trade promotes competition between oligopolists, it hurts the oligopolists and benefits everyone else.
The benefit to everyone else can be greater or less than the harm to the oligopolists, depending on transport costs, asymmetries, product differentiation, and mode of competition.

Where we are.

3 Why Do Americans Get Their Impalas from Canada?

International Trade

John McLaren

3.1 Impalas on the Horizon
3.2 Increasing Returns More Generally
3.3 How to Tackle Europe: Trade versus FDI
3.4 On a Smaller Scale: Trade and Increasing Returns in Furniture
3.5 Adding Heterogeneity: The Melitz Effect

Consider the Chevrolet Impala.
Classic American car.

Some Chevrolet facts:
All Impalas are now made at Oshawa, Ontario.
Roughly 200, 000 imported into the US per year.
All Cobalts are made in Lordstown, Ohio (similar but smaller Chevrolet).

Why?
Comparative advantage?
Requires Canada to have comparative advantage in Impalas, US to have one in Cobalts.
Let’s list some reasons a country might have a comparative advantage in something, and see if that is reasonable.

The design and know-how originated in the US, so it could be produced in the US (technology is not an issue).
Canada is certainly is not a low-wage country; wages, education, infrastructure, and standards of living are very similar to what they are in the US.
Therefore, it is hardly plausible to argue that Canadians simply have a comparative advantage in producing Impalas, while Americans have a comparative advantage in producing Cobalt.

Comparative advantage doesn’t seem to explain US imports of Impalas.
Alternative: Two factors:
I. Canada-US Auto Pact of 1965
II. Increasing returns to scale

I. Canada-US Auto Pact of 1965
Before 1965, both countries had high tariffs on imported cars and auto parts.
Result: Big 3 automakers mostly produced in Canada for Canadian market.
Little trade; exports from Canada virtually zero.
Duplicated assembly lines on both sides of the border.
Production on smaller scale in Canada: High cost per unit.

Pact provided for free trade between US and Canada.
(Some exceptions: e.g., fire engines.)
Some restrictions applied:
US side: Minimum Canadian content required for duty-free status.
Canadian side: Employment at plants in Canada needed to keep on increasing.

Upshot:
Free trade in autos and auto parts between US and Canada.
But Detroit had to maintain the same level of production in Canada.
Agreement was grandfathered into CUFTA (1988) and NAFTA (1994).

For convenience, U.S. exports to Canada are shown as positive values whereas, U.S. imports from Canada are shown as negative values. This implies that the more positive (negative) the value is, the larger are the exports (imports).

II. Increasing returns to scale.
Setting up and maintaining an assembly line for one model requires huge fixed costs.
E.g., even just to maintain the machines in line to be able to produce 1 car per month.
Induces increasing returns to scale (IRS).
An industry exhibits IRS if and only if an x% increase in all inputs increases the output by more than x%. Equivalently, (assuming that factor markets are competitive) an industry has IRS if an x% increase in output increases cost by less than x%, thus lowering average cost.

Fixed costs and IRS.
Suppose cost of producing Q Impalas at Oshawa is equal to C(Q) = F + waQ.
Then cost of producing 2Q Impalas at Oshawa is equal to F + 2waQ.
LESS THAN TWICE.
Essence of IRS: Double output, less than double cost.

Implications for geographic allocation of production:
Need to maintain same level of production in Canada
But can save on costs by reducing number of models produced in each country.

Suppose that GM needs to produce 11 models.
Each model:
200,000 units for the US market,
20,000 units for the Canadian market.
Assume that in either country, production costs are given by F + waQ for each model, where F is the fixed cost, a is the unit labor requirement for each car, w is the wage and Q is the total number of cars produced.

Pre-Auto Pact.
11 models produced in Canada; 20,000 units each.
Cost for each model = F + wa20,000.
11 models produce in US; 200,000 units each.
Cost for each model = F + wa200,000.
Total cost for GM: 22F + wa11x220,000 = 22F + wa2,420,000.

Post Auto Pact.
Now, GM can concentrate production of each model in one location.
Produce 1 model in Canada, 10 in the US.
Produce 220,000 units at each plant.
Now costs are equal to 11x(F + wa220,000) = 11F + wa2,420,000.

Thus, GM has saved 11F.
Same number of each type of car produced, but costs are lower.
Note: Before, there was no trade in cars.
Now, every car is traded.
200,000 cars exported from Canada to the US.
200,000 cars exported from the US to Canada.
Intra-industry trade.

The point:
IRS provides a reason for trade, by creating an incentive to concentrate production of each product in one location.

Kinds of IRS.
Internal IRS.
Double the firm’s inputs and more than double that firm’s output.
Can result from fixed cost.
Can also result from learning by doing.
Implies a downward-sloping AC curve.
Note: Incompatible with perfect competition.

To see this: Assume Total Cost (TC) = F + cQ, where F is fixed cost, c is marginal cost and Q is the total quantity produced. Because of the presence of the fixed cost, average cost (AC) is always larger than marginal cost (MC):
AC = TC/Q = F/Q + c and MC = dTC/dQ = c
So, AC > MC.
Because average cost is always greater than marginal cost, it is not possible to have a perfectly competitive equilibrium (since price = marginal cost implies negative profits).

External, national IRS.
Double all inputs employed by all firms in an industry in one country, and more than double total industry output.
Can result from learning-by-doing spillovers.
Can also result from shared infrastructure improvements.

External, international IRS.
Case when external, national IRS are not present, but if you double the inputs of all producers in the industry worldwide it will more than double worldwide output.

IRS sheds light on a number of additional topics in trade:
I. How to tackle a foreign market.
II. Role of monopolistic competition in trade.
III. Intra-industry trade.

Tackling a foreign market.
You are the CEO of GM.
You want to break into the European market.
Two options: Produce here and export, or produce over there.

Producing in Europe:
FDI Option.
Set up a plant in Spain.
Fixed cost: F.
After that, each unit requires a* units of labor.
Each unit of labor costs w*.
Choose P to maximize (P – a*w*)Q(P) – F.
This yields maximum profit from FDI option.

Producing here: Export option.
No additional fixed cost. (Important.)
Each unit requires a units of labor.
Labor costs w per unit.
Transport cost of k(d) per car, where d is distance to market.
Tariff of t per car.
Choose P to maximize (P-wa-k(d)-t)Q(P).

Compare the two.
FDI option is more likely to be attractive if:
w*a* is small;
t is high;
d is high;
F is small.

Brainard (1997) study examined US exports and foreign sales of foreign affiliates of US multinationals.
Key variable: Export share of total foreign sales of each industry.
Found pretty good evidence for the last three of these points.
(Didn’t really look at the first one; that’s harder.)

How does GM actually serve Europe?
Mostly through OPEL subsidiary (FDI option).
Cars are made in Europe.
BUT: Each model is made in only one location in Europe (e.g., Zaragoza, Spain).
Thus, intercontinentally — FDI option; within Europe, export option.

Monopolistic competition in trade.
IRS matters not only for giant firms like GM.
Pervasive in manufacturing, including small-scale manufacturing.
E.g., furniture.
A pretty good description of this type of industry: Monopolistic competition.

Example: Baronet and Thos. Moser
Two medium-sized firms.
Each has a tiny share of the total furniture market.
Baronet is Canadian; Moser is American.
Fixed cost from production and design.
Distinctive styles.

Baronet Java dining set.

Thos. Moser Hawthorne dining set.

Key features of monopolistic competition:
Large number of firms; each small compared to the whole market.
Each produces a unique product; hence, monopoly power.
Free entry, hence zero profits in equilibrium.

Baronet’s demand curve conditional on the number
of other furniture firms in the industry
If more firms to enter, at a given price Baronet would
lose some customers to them, so its demand will shift
to the left. If some firms shut down, its demand will
shift to the right.

Since in equilibrium, P* = AC given by the tangency condition, it must necessarily occur at the downward sloping portion of the AC curve.
This means in equilibrium, we cannot reach the minimum point of the AC curve (also named as minimum efficient scale).
This can be interpreted loosely as the cost of providing more variety. If the number of firms was reduced by 10% and each firm produced 10% more output, total output will be unchanged and average costs would go down, but there would be less variety available for consumers.

Opening up trade flattens Baronet’s demand curve, so it becomes more sensitive to price changes.
Raising its price will send some of its customers to a US competitor;
Lowering its price will grab some customers from US competitors.
Thus, each firm’s demand is now more elastic.

Thus, Baronet now has an incentive to lower its price and sell more dining sets.
But at the same time all other firms have the same incentive.
All other furniture makers therefore cut their prices and increase their sales, shifting Baronet’s demand curve down.
If industry-wide price cutting goes far enough, firms start to lose money, some will exit until remaining firms just break even.
As a result, each country has fewer furniture makers but each consumer can access to a greater variety of furniture (since they can access to varieties in the other country as well).

Implications:
Plenty of trade even between identical countries.
Once again, trade results from IRS.
Trade is intra-industry.
Trade reduces number of products produced in each country (“shake-out”).
But increases variety available to each consumer.
In addition, trade tends to increase elasticity of demand for each product: P closer to MC.

Intra-industry trade.
Important feature of trade between similar countries where monopolistic competition is important.

Exports of k from country i to country j:
Total trade between i and j:
Net trade, or inter-industry trade,
in industry k:
Net trade as a fraction of total trade:
Intra-industry trade as a fraction of total trade:

Adding heterogeneity: The Melitz effect.
It’s actually a stretch to assume that all furniture makers are equally productive.
Suppose there are high-cost and low-cost producers in the same industry — heterogeneous firms?
Question was explored in an influential paper by Marc Melitz (2003).

The constant f is a fixed labor requirement, and is the same for all firms.
Therefore, the fixed cost is equal to wf, where w is the wage.
Suppose that to produce q units of output, a firm must hire f + q/Φ units of labor.

The parameter Φ represents the marginal product of labor, which is a constant for each firm, but varies from firm to firm. Thus, Φ is a measure of firm’s productivity. More productive firms have higher values of Φ.
The marginal cost for each firm is equal to w/Φ, where w is the wage.
Suppose that to produce q units of output, a firm must hire f + q/Φ units of labor.

Autarky equilibrium.
Firms enter until the profits for the marginal firm are equal to zero.
Only the most efficient firms enter.
More productive firms (higher Φ) produce more and make higher profits than less productive firms.

Now open up trade.
If a firm wants to export, it must pay an additional fixed cost (e.g., setting up a distribution network).
As a result, only the most productive firms choose to export.
Less productive firms are hit by imports but don’t benefit from exports.
Therefore, less productive firms produce less and have lower profits than before trade; some drop out.

Result: Effects of trade.
More productive firms benefit from less productive firms dropping out; their output and profits go up.
Market share of less productive firms falls; market share of more productive firms rises.
Average productivity of industry therefore rises.
Call this the ‘Melitz effect.’

The outcome is important: Trade causes the most productive firms to export and expand, while less productive firms serve the domestic market and shrink, and the least productive firms drop out entirely.
This all implies that globalization raises productivity for two reasons:
The least productive firms drop out.
Among the surviving firms the market share of the more productive firms rises at the expense of the market share of the less productive firms.

Increasing returns to scale and trade: Main points.
IRS is a reason for trade: Motive to concentrate production of each product in one spot.
Three types of IRS: Internal, external national, and external international.
In serving a foreign market, stronger IRS argues for exporting, but higher tariffs or transport costs argue for local production via FDI.
Many industries have small-scale IRS, many producers, differentiated products: monopolistic competition.
Explains intra-industry trade.

Increasing returns to scale and trade: Main points.
Finally, heterogeneous firms plus IRS yields the Melitz effect: Trade raises industry productivity by increasing market share of more productive firms at the expense of less productive firms.

Where we are.

International Trade Assignment 2, Semester 1, 2020 Page 1

INTERNATIONAL TRADE ASSIGNMENT 2
SEMESTER 1, 2020

I. INTRODUCTION

1. You are required to analyse any relevant issue using your technical skills. This
involves utilizing your knowledge in international trade models as well as
inspecting and interpreting data.

2. You need to communicate your results in an effective way.

II. DATA SOURCE

You need to obtain the country-level data for Argentina and El Salvador on:

i. Imports of goods and services (in current US$)
ii. Exports of goods and services (in current US$)

iii. GDP (in current US$)
iv. GDP per capita (in current US$)
v. GINI Index (World Bank estimate) from the World Bank’s World

Development Indicators:
(http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators).

[Note that if your browser (such as Chrome) does not open the web page; try a
different browser (such as Internet Explorer)]

Please DO NOT attach Excel files to the brief. The policy brief needs to be precise
and short. Avoid unnecessary jargon. Your policy brief cannot exceed two pages.

International Trade Assignment 2, Semester 1, 2020 Page 2

III. REQUIRED TASKS

Your tasks involve two dimensions. First, you need to analyse the data (see Steps 1, 2
and 3 in the next section). Second, you also need to perform a technical analysis by
considering a hypothetical trading environment based on Ricardian model (see Step 4 in
the next section).

Accordingly, you are required to:

 Provide a visual representation of the relationship between openness and
inequality by plotting a graph (use scatter plot) that shows the change in openness
with respect to GINI index for these countries over the period between 1998 and
2014 (including all years, i.e., 1998, 1999, …, 2014).

 Establish how being integrated with the rest of the world affected inequality in
these two countries by looking at the correlation between their openness and
GINI index.

 State and explain whether your data findings are in line with theory (Assume both
Argentina and El Salvador are unskilled-labour abundant countries).

 Continue your technical analysis from your first report and state what would have
happened to these countries once they are allowed to trade with each other based
on our hypothetical scenario of Ricardian model.

IV. REQUIRED STEPS TO COMPLETE EACH TASK

DATA ANALYSIS

For data analysis, you need to follow Steps 1, 2 and 3 given below.

Step 1. Using data you obtained for Argentina and El Salvador, plot openness (as a
percentage) against GINI index for each nation. Use two graphs, one for each
country (as a chart type: you are required to use scatter plot). You need to
use your openness calculations from Step 1 of Assignment 1). Put openness (as
a percentage) on the vertical axis and GINI index on the horizontal axis.

Step 2. Using data you obtained for Argentina and El Salvador, calculate the
correlation coefficient (using CORREL command in excel) between Openness
and the GINI Index for each nation.1 Report and interpret this relationship in
up to 200 words and state for which country this relationship is stronger. [Hint:

1 The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a
percentage of the maximum area under the line. A Lorenz curve plots the cumulative percentages of total income received
against the cumulative number of recipients, starting with the poorest individual. Thus a Gini index of 0 represents perfect
equality, while an index of 100 implies perfect inequality. The Gini index provides a convenient summary measure of the
degree of inequality.

International Trade Assignment 2, Semester 1, 2020 Page 3

the GINI is often used as a proxy for the ratio of skilled to unskilled wages in
empirical studies].

Step 3. Assume that both Argentina and El Salvador are unskilled-labour abundant.
First define, Stolper-Samuelson theorem and then check whether your data
findings are in line with the Stolper-Samuelson theorem. Explain your answer
up to 200 words.

TECHNICAL ANALYSIS

For technical analysis, you need to follow Step 4.

a) Derive the relative demand curve relating the relative demand for Widgets
to the relative price of Widgets. Do this algebraically, and then show what
the curve looks like in a diagram (put the relative price of Widgets on the
vertical axis and the relative quantity of Widgets demanded on the
horizontal axis).

b) Derive the world relative supply curve of Widgets (put the relative price of
Widgets on the vertical axis and the relative quantity of Widgets supplied
on the horizontal axis).

c) Put in the same figure the relative demand curve for Widgets that you found
in part (a) and the world relative supply curve of Widgets that you found in
part (b). Determine the equilibrium relative price of Widgets and the
equilibrium relative quantity of Widgets under free trade.

d) Under free trade, which country produces which good(s)? How many
units?

e) Who gains from trade? Who loses from trade? State workers’ stance
towards free trade in each country, i.e., do they support or oppose free
trade?

International Trade Assignment 2, Semester 1, 2020 Page 4

V. PRESENTATION OF RESULTS

You need to provide a brief in order to effectively communicate your findings. In your
brief, you must have the following ingredients:

 Headline: One possible example is: “A Simple Analysis of Openness for
Argentina and El Salvador: Part II”

 Data Analysis: In this section, you need to present your data analysis based on
your findings in Steps 1, 2 and 3.

 Technical Analysis: In this section, you need to communicate your technical
results based on your findings in Step 4.

International Trade Assignment 2, Semester 1, 2020 Page 1

INTERNATIONAL TRADE ASSIGNMENT 2
SEMESTER 1, 2020

I. INTRODUCTION

1. You are required to analyse any relevant issue using your technical skills. This
involves utilizing your knowledge in international trade models as well as
inspecting and interpreting data.

2. You need to communicate your results in an effective way.

II. DATA SOURCE

You need to obtain the country-level data for Argentina and El Salvador on:

i. Imports of goods and services (in current US$)
ii. Exports of goods and services (in current US$)

iii. GDP (in current US$)
iv. GDP per capita (in current US$)
v. GINI Index (World Bank estimate) from the World Bank’s World

Development Indicators:
(http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators).

[Note that if your browser (such as Chrome) does not open the web page; try a
different browser (such as Internet Explorer)]

Please DO NOT attach Excel files to the brief. The policy brief needs to be precise
and short. Avoid unnecessary jargon. Your policy brief cannot exceed two pages.

International Trade Assignment 2, Semester 1, 2020 Page 2

III. REQUIRED TASKS

Accordingly, you are required to:

 Establish how being integrated with the rest of the world affected inequality in
these two countries by looking at the correlation between their openness and
GINI index.

 State and explain whether your data findings are in line with theory (Assume both
Argentina and El Salvador are unskilled-labour abundant countries).

IV. REQUIRED STEPS TO COMPLETE EACH TASK

DATA ANALYSIS

For data analysis, you need to follow Steps 1, 2 and 3 given below.

International Trade Assignment 2, Semester 1, 2020 Page 3

the GINI is often used as a proxy for the ratio of skilled to unskilled wages in
empirical studies].

TECHNICAL ANALYSIS

For technical analysis, you need to follow Step 4.

b) Derive the world relative supply curve of Widgets (put the relative price of
Widgets on the vertical axis and the relative quantity of Widgets supplied
on the horizontal axis).

d) Under free trade, which country produces which good(s)? How many
units?

e) Who gains from trade? Who loses from trade? State workers’ stance
towards free trade in each country, i.e., do they support or oppose free
trade?

International Trade Assignment 2, Semester 1, 2020 Page 4

V. PRESENTATION OF RESULTS

You need to provide a brief in order to effectively communicate your findings. In your
brief, you must have the following ingredients:

 Headline: One possible example is: “A Simple Analysis of Openness for
Argentina and El Salvador: Part II”

 Data Analysis: In this section, you need to present your data analysis based on
your findings in Steps 1, 2 and 3.

 Technical Analysis: In this section, you need to communicate your technical
results based on your findings in Step 4.

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We Analyze Your Problem and Offer Customized Writing

We understand your guidelines first before delivering any writing service. You can discuss your writing needs and we will have them evaluated by our dedicated team.

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We Mirror Your Guidelines to Deliver Quality Services

We write your papers in a standardized way. We complete your work in such a way that it turns out to be a perfect description of your guidelines.

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We Handle Your Writing Tasks to Ensure Excellent Grades

We promise you excellent grades and academic excellence that you always longed for. Our writers stay in touch with you via email.

Thorough research and analysis for every order.
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Areas of Expertise

Essay

Thesis

Presentation

Dissertation

Term Paper

Research Paper

Book Review

Assignment

Report

Case Study

Letter

Article

Coursework

Speech

Q & A

Critical Thinking

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See How We Helped 9000+ Students Achieve Success

We Analyze Your Problem and Offer Customized Writing

We Mirror Your Guidelines to Deliver Quality Services

We Handle Your Writing Tasks to Ensure Excellent Grades