International Trade

UGBA 118 – International Trade
Professor Matilde Bombardini
Problem Set 1
Due by 9am Wed, September 14, 2022
on bCourses
1 Ricardian Model
Two countries, the US and Canada, use only one factor, labor, to produce
two goods, Milk and Computers. The two countries marginal product of labor
(MPL) for the two goods are:
Milk Computers
US 1
1
5
Canada 1
2
1
12
so that for example in the US one worker produces 1
5
of a computer. The
US has a labor force of 1000 workers, while Canada has a labor force of 300
workers.
Preferences are the same in the two countries and are described by the
following Cobb-Douglas utility function:
U(QM, QC ) = Q
1
4
MQ
3
4
C
HINT: an individual with these Cobb-Douglas preferences spends a share 1
4
of
her income on Milk i.e. pMQM =
1
4
I and the rest on computers pC QC =
3
4
I,
where I is income.
1. Which country has an absolute advantage in producing Milk? Which country has an absolute advantage in producing Computers? Which country
has a comparative advantage in producing Milk?
2. Draw the production possibility frontier for Canada and for the US.
3. What is the relative price of Milk in autarky in Canada? Calculate the
quantity produced and consumed of Milk and Computers in Canada under
autarky (remember under autarky you have to consume what you produce,
and the PPF is effectively you budget constraint)
1
4. Draw the autarky equilibrium for Canada in the same graph as in point
2.
5. Now imagine the two countries are allowed to trade. First state the possible values the equilibrium world relative price pM
pC
can take, which country
will export milk and which country will import milk.
6. In a graph, draw the qualitative (i.e. approximate, not precise) shape of
the export supply for milk and import demand for milk as a function of
pM
pC
.
7. The equilibrium world price is pM
pC
=
1
5
(I have calculated it for you!). Do
both countries gain from trade? Explain why without calculating the new
consumption points.
2 Population growth
Take the same setup as in the previous problem, but now imagine that Canada
experiences fast population growth.
1. Show how the international equilibrium in the milk market (export supply
and import demand) changes after the increase in population in Canada.
Does the relative price of milk increase or decrease?
2. Are initial Canadian residents better off or worse off as a result of population growth?
3 Measuring productivity and comparative advantage
This problem asks you to calculate the productivity of different countries in
different sectors and determine comparative advantage. Perform the data exercise in Problem 1 (page 57) of Feenstra and Taylor taking two specific countries
(Japan and Brazil) in a year of your choice. Find the relevant page of the
textbook within the bCourses assignment.
2