International Economics, ECON 630
Due on Wednesday, July 2 @ 11:00pm PT
(Total 50 points)
1. Why did the Mercantilists consider holdings of precious metals so important to nation-state building? (6 points)
Wealth was viewed as synonymous with holdings of precious metals. Nation-states wished to become wealthy and this meant obtaining large holdings of precious metals. It is also argued by some that the shortage of coinage constrained the growth of these nation-sates and that precious metals were required to increase the supply of coinage (money) in order for the countries to grow.
2. Assume that both the United States and Germany produce beef and computer chips with the following costs: (12 points)
United States (dollars)
Unit cost of beef (B)
Unit cost of computer chips (C)
a. What is the opportunity cost of beef (B) and computer chips (C) in each country?
In the United States: the opportunity cost of one unit of beef is 2 chips; the opportunity cost of one chip is 1/2 unit of beef. In Germany: the opportunity cost of one unit of beef is 4 chips; the opportunity cost of one chip is 1/4 unit of beef. b. In which commodity does the United States have a comparative cost advantage? What about Germany?
The United States has a comparative cost advantage in beef with respect to Germany, while Germany has a comparative cost advantage in computer chips.
c. What is the range for mutually beneficial trade between the United States and Germany for each computer chip traded? The range for mutually beneficial trade between the United States and Germany for each unit of beef that the United States exports is: 2C < 1B < 4C
d. How much would the United States and Germany gain if 1 unit of beef is exchanged for 3 chips? Both the United States and Germany would gain 1 chip for each unit of beef traded.
3. “If U.S. productivity growth does not keep up with that of its trading partners, the United States will quickly lose its international competitiveness and not be able to export any products, and its standard of living will fall.” Critically evaluate this statement in light of what you have learned in chapter 3 of the textbook. (10 points)
This statement could be true if trade was based on absolute advantage. However, since trade can take place on the basis of comparative advantage, what counts is relative cost differences. Consequently a country can be less efficient or become less efficient in all goods and yet again from trade as long as there are relative cost differences in autarky. Thus, different rates of productivity growth may change what a country exports, but it is unlikely that it would ever take away the basis for trade, its ability to expert.
4. The following table shows the number of days of labor required to produce a unit of textiles and autos in the United Kingdom and the United States: (12 points)
a. Calculate the number of units of textiles and autos that can be produced from 1 day of labor in each country.
In the United Kingdom one day of labor can produce 1/3 of a unit of textiles and 1/6 of a unit of automobiles. In the United States, one day of labor can produce ½ of a unit of textiles and 1/5 of a unit of automobiles. b. Suppose that the United States has 1,000 days of labor available. Construct the production-possibilities frontier for the United States.
c. Construct the U.S. consumption-possibilities frontier with trade if the terms of trade are 1 auto: 2 units of textiles.
500 textiles U.S...
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