“Product Cycle” Theory of Trade

1. The Home country has 2,800 units of labor available while the Foreign country has 1700 units of labor. The two countries produce two goods, textiles and soybeans. The unit labor requirements in textile production for the Home and Foreign countries is 7.2 and 2.7, respectively, while soybean production requirements is respectively 3.1 and 5.5.

a.) Graph the Home and Foreign production possibilities frontiers.

b.) What is the opportunity cost of textiles in terms of soybeans for both countries?

c.) What is the opportunity cost of soybeans in terms of textiles for both countries?

d.) What will be the no trade Terms of Trade (or PS/PT) for each country?

e.) How will the Terms of Trade (or PS/PT) change for each country if they trade?

d.) Show the trade triangles for the two trading countries.

2. Describe the Specific Factor Theory of Trade, the assumptions, and give an example of your choice that demonstrates an autarky (no trade) to a free trade solution. Use a PPC type graph/model with values of your choice to demonstrate the solution stages.

3. Describe the “Product Cycle” Theory of Trade, its phases and why it may result in a type of two-way trade over time. You may use the diagram in 2. for guidance:

lifecycle.gif

4. Describe the Factor Proportions of Heckscher-Olin Theory of Trade, the assumptions, and give an example of your choice that demonstrates an autarky (no trade) to a free trade solution. Make sure you label exports, imports, trade triangles, and terms of trade in the solution. You may use the PPC type graph/model below for structure to demonstrate the solution stages.

5. Calculate the before and after consumer surplus (CS) from a tax, before and after producer surplus (PS) from the tax, Tax revenue from the tax, deadweight loss from the tax, when Pbuyers price=$6.80, Psellers price=$5.30, P*= $6.10, Dintercept=$8.60, Sintercept=$2.15, Qwith tax =2500, and Qwithout tax=4200.

6. Use the Figure below to answer parts a.) and b.).

a.) Calculate the loss to consumers if the government levies a tariff on the imported good above if Pworld=3.50 Pdomestic=3.80 Pworld+tariff=3.65 Qsdomestic=4 Qs1=16 Qdomestic=19 Qd2=27 Qddomestic=33

b.) Calculate the deadweight loss to society if the government levies a tariff on this imported good if Pworld=3.20 Pdomestic=3.95 Pworld+tariff=3.45 Qsdomestic=5 Qs1=14 Qdomestic=21 Qd2=28 Qddomestic=35

7. Using the figure below, calculate the before and after consumer surplus (CS), Producer Surplus (PS), deadweight losses, and tariff revenue from the implementation of a tariff. Note: S0 = 140, S1 = 189, D0 = 290, and D1 = 235

Image result for tariff graph image

8. 

a.) In the “medium-run” where both product and asset markets have enough time to adjust, what will happen to the euro-$ exchange rateand US output if both the $ interest rate and government spending (G) increase?

b.) In the “medium-run” where both product and asset markets have enough time to adjust, what will happen to the $-yen exchange rateand US output if government spending (G), the foreign price level, and the domestic price level all rise?

9. When combined with money demand and money supply, the theory of purchasing power parity (PPP) leads to a useful “long-run” theory of how exchange rates and monetary factors interact. Use the following formula for the US dollar ($) – euro exchange rate to answer parts a. – c. below:

a. Ifdecreases, will the US dollar ($) appreciate or depreciate?

b. Ifdecreases, will the euro appreciate or depreciate?

c. Ifincreases, will the euro appreciate or depreciate?

10.) 

a.) In the “medium-run” where both product and asset markets have enough time to adjust, what will happen to the $-pound exchange rateand output if both Taxes (T) and the expected future Ee) exchange rate increases?

b.) In the “medium-run” where both product and asset markets have enough time to adjust, what will happen to the $-Mexican peso exchange rateand output if the domestic price level (P) increases?

11.) Explain the basic components of the Balance of Payments and explain how are they related to comparative advantage and the pattern of trade in a country?

12.) Looking at Exchange Rate Determination in the “short-run,” use the information on the following interest parity-money market model to answer the questions below:

a.) What will happen to the peso in the short-run if the central bank in Switzerland increases the money supply in Switzerland?

b.) What will happen to the SwissFranc (SF) in the short-run if income increases in Switzerland?

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