Problem Set 1

1.	Refer to the Ricardian Model handout from class for this question, and use the information for countries 3 and 4.
	a.	Complete the information in the handout for the two countries.
	b.	If there were trade between the two countries, which country would tend to export razors and import wigs? Explain briefly.

2.	Consider the following statement: "High-paid U.S. workers can't compete with cheap foreign labor."
	a.	Why do you think so many people honestly accept this statement as true?
	b.	How would you respond to a person who told you this if you wanted to help the person see the situation more clearly?

3.	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 Wheat  Steel US 10 bushels 100 pounds SK 1 bushel 50 pounds
	a.	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.
	b.	Suppose that the US and South Korea agree to a trade 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

4.	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 in Ecuador can produce 2 pounds of coffee or 10 pounds of sugar in one labor-hour. Is direct or indirect production of sugar the better option for Ecuador? Explain.

5.	Carbaugh, Ch.3, problem 10.

6.	a.	State the formula for a country's terms of trade.
	b.	The terms of trade for many lesser developed countries (LDCs) have been declining for many years. Many people have pointed to this trend as evidence that these LDCs are worse off now than they used to be.
		(1)	Could these trade critics be right? If so, why? If not, why not?
		(2)	Could these trade critics be wrong? If so, why? If not, why not?

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. Show both seasons in the same diagram, label the U.S. quantities demanded, supplied and traded in both seasons, and indicate the U.S. gains from trade in both seasons.

8.	Trade between large countries: The diagrams below show the pretrade situation for the U.S. compared to the rest of the world (RoW) in the market for shirts.
		US market Trade market RoW market
	a.	The RoW export supply curve (Sx') has already been drawn in the trade market. Add the U.S. impord demand curve (Dm) to the trade market diagram.
	b.	Indicate the free-trade equilibrium price of shirts, quantity of trade and approximate gains from trade for the U.S. in both the trade market diagram and the US market diagram.

9.	Suppose that Cuba is a large-country exporter of sugar.
	a.	Depict Cuba's current gains from trade in a trade-market diagram for its sugar exports.
	b.	Now suppose that the U.S. removes the embargo it currently has against the import of sugar from Cuba. Indicate the impact of this policy change in your diagram. Be sure to indicate the change in Cuba's gains from trade.

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