Problem Set 1

Suppose that in the short run, labor is the only variable input in the production of wheat and steel. Suppose that both South Korea (SK) and the United States (US) devote millions of labor hours to the production of both goods, with the following hypothetical productivity information at their current output levels:

	Output per labor hour		Opportunity cost per...
	Wheat	Steel	Bushel of Wheat	Pound of Steel
US	10 bushels	100 pounds		1/10 bu. of Wheat
SK	1 bushel	50 pounds
US/SK	10		--------------------

Complete the table above.

If there were trade between the US and South Korea in these two products, who would tend to export steel and import wheat? Explain briefly.

Suppose that the US and South Korea agree to trade a total of 150 pounds of steel for 6 bushels of wheat. Suppose that the US then switches 1 labor hour from steel production to wheat production while SK switches 4 labor hours from wheat production to steel production. Complete the table below to verify that after the production adjustment and the exchange the US and South Korea each ends up with more steel and more wheat than it had initially.

	US: 1 labor hour shifts to W		SK: 4 labor hours shift to S		World
	Wheat	Steel	Wheat	Steel	Wheat	Steel
DProduction	+10	-100
Trade					---	---
DConsumption

Consider the following price information for Switzerland and France:

	Product prices
	Bottle of wine	Pound of cheese
Switzerland	12 Swiss francs	3 Swiss francs
France	30 French francs	15 French francs

If there were wine/cheese trade between these two countries, what pattern of trade would you expect to see? Support your answer.

Suppose that Peru and Spain use only labor to produce anchovies and green olives. Consider the following production information:

	Pounds of output per labor hour
	Green olives	Anchovies
Peru	6	12
Spain	3	2

If there were trade in green olives and anchovies between these two countries, what pattern of trade would you expect to see? Briefly support your answer.

Suppose that workers in Peru earn $12 per hour and workers in Spain earn $3 per hour.

(1)

In Peru, how much would it cost to produce each pound of green olives? Of anchovies

(2)

In Spain, how much would it cost to produce each pound of green olives? Of anchovies

(3)

Decide whether the following is true or false, and explain briefly: "High-paid Peruvian workers can't compete with cheap Spanish labor."

6.	Decide whether the following is true or false, and support your answer: "High-paid U.S. workers can't compete with cheap foreign labor."

Supply and demand trade geometry

7.	Trade for a small country: Suppose that the world price of apples is $.80 per pound year-round and that the U.S. is a small country in the global apple market. The U.S. has a stable domestic demand for apples all year, but there is a larger domestic supply of apples in the fall than in spring, because fall is the U.S. harvest season. As a result, the U.S. is an apple exporter in the fall, and an importer in the spring. Use a domestic market supply and demand diagram for the U.S. to contrast the market situations in the fall and the spring. (1) Show both seasons in the same diagram; (2) label the U.S. quantities demanded, supplied and traded in both seasons; and (3) indicate the U.S. gains from trade in both seasons.

The terms of trade have deteriorated over time for many lesser developed countries (LDCs).
Economist Raul Prebisch has offered one possible explanation for this phenomenon, claiming that it has happened because the products LDCs export are produced under competitive conditions while the products exported by developed countries (DCs) are produced under oligopoly/monopoly conditions.
Another possible explanation relies on supply-and-demand trends instead. To illustrate how it works, use the three-panel diagram for primary products below to show how the price of the primary products exported by LDCs would change over time if, IN BOTH DCs AND LDCs the supply curve for primary products shifts horizontally by 1-1/2 gridlines because of increased productivity.


DC market	Trade market	LDC market

9.	The U.S. is the only source of spare parts for its military aircraft, and therefore a large-country exporter of them. Demand comes from countries who have previously imported U.S. military aircraft.
	a.	Depict the U.S. gains from trade in a trade-market diagram for its military aircraft spare parts.
	b.	The U.S. has imposed an embargo on exports of military items to Iran, which owns many U.S. military aircraft. Depict the impact of this embargo in your diagram. Decide whether each of the following rises, falls, remains the same, or changes in an uncertain direction, and briefly explain your decision in each case:
		(1)	U.S. gains from trade
		(2)	Iran's gains from trade
		(3)	the rest of the world's (ROW's) gains from trade

1.	Consider the reading by Bearak (2003), Why people still starve:
	a.	List two examples that illustrate how globalization has reached the poor in Malawi.
	b.	List two examples that illustrate how globalization has not reached the poor in Malawi.

5.	Open economies have two ways to "produce" a good: (1) direct production (produce it yourself) and (2) indirect production (produce something else and trade it to get the good). Suppose that on the world market, 1 pound of coffee trades for 8 pounds of sugar, while in Ecuador a worker can produce 2 pounds of coffee or 10 pounds of sugar in one labor-hour. Which option leads to more sugar for Ecuador, direct or indirect production of sugar? Support your answer.

10.	Staple your work. (stapling always carries the weight of one problem on each problem set.)