Jim Whitney Economics 311

Monday, February 27, 2012

Problem Set 3

International factor migration

1.

Consider the possibility of labor migration between two countries, one a capital-abundant developed country (DC) and the other a labor-abundant lesser developed country (LDC). 
a. Use the three-panel diagram below to illustrate some unskilled labor migration (but not enough to equate the wage in the two countries).
   
         
b. In the international market panel, indicate
    (1) the change in wages in the DC;
    (2) the change in wages in the LDC;
    (3) the change in national welfare for the DC; and
    (4) the change in national welfare for the LDC.
(Hint: keep in mind that the income earned by immigrant workers counts in the GNP of their home country.)
c. Why do you think real-world labor migration might stop short of the amount that would fully equalize the wage in the two countries?
 

2.

Consider the following current account balances (CABs) for 2009 (in billions of dollars):
  China: (+297.1); Japan: (+140.6); Pakistan (-2.9); United Kingdom (-32.7)
Which of these CABs are consistent with the basic economic model of capital migration and which are not? Briefly explain how you decided..
 

 

Globalization outcomes

3.

Briefly list (about a sentence apiece) some of the reasons countries can gain from trade (Hint: we covered six in class.)
   

4.

Consider two countries: (1) a capital-abundant developed country (DC) and (2) a labor-abundant lesser developed country (LDC). 
a. Draw initial autarky unskilled labor market diagrams for the two countries.
b. Illustrate the combined impact in each of the labor markets of the following developments between the two countries: (1) trade liberalization (which means moving toward free trade), (2) labor migration. and (3) foreign investment.
c.  Overall, what is the impact of increased globalization between DCs and LDCs on the price of unskilled labor (PL) in (1) the DC? (2) The LDC? That is, does PL rise, fall, remain the same, or move in an uncertain direction? Explain briefly.
 

5.

Use the Stolper-Samuelson theorem to help answer the following questions.
a. Suppose that as a country's average income level rises, tastes shift in favor of high-tech advanced goods and away from labor-intensive basic goods. How will that shift in tastes affect the country's distribution of income?
b. Suppose that a lesser developed, labor-abundant country decides to pursue import-substitution industrialization. How will the resulting shift in production affect the country's distribution of income?
c.  Consider economies whose most significant factors of production are unskilled labor (L) and land (T = terra firm). The region of Latin America is relatively land-abundant, while Southeast Asia is relatively labor-abundant. Incomes go to land-owners and labor-owners.
    (1) Predict who will gain and who will lose within each region as they open up to international trade, and explain your reasoning.
    (2) Evidence suggests that the distribution of income is typically more equal in Southeast Asia than it is in Latin America. Based on your answer to part (1), are you surprised? Why or why not?
 

6.

Decide whether each of the following quotes is consistent or not consistent with economic analysis of markets and globalization, and briefly explain your decision.
  a. "There is a unanimity among the developing countries that protectionism [against trade] is the common enemy."
    Sergio Amaral, Brazil's chief trade negotiator,  The Poor Speak Up (2002)
  b. "As skill levels improve in cheap-labor countries -- for example, the new engineering class in India -- competition is coming on in the very products for which the U.S. has had a global advantage, such as software. If the new competition drives down prices,... U.S. export earnings will suffer, and the entire U.S. economy could end up worse off."
    Aaron Bernstein, Shaking Up Trade Theory (2004)
  c. "At the [Leimert Park] forum, many blacks said they bore no ill will toward immigrants in general but were alarmed by their seeming impact on their lives."
    Teresa Watanabe, Immigration Forum Gets Intense (2006)
 

 

7.

Consider the following information comparing Vietnam to the U.S. and to the World as a whole.
 
  Average annual growth rates, 1986-2009 Export share Real GDP
per capita ($2010)
  a b c d e f g h i
 

Popula-tion

Real GDP

Real exports

Export share

Real GDP per capita

 1986 2009 1986 2009
Vietnam 1.6% 7.1% 18.5% 10.7% 5.4% 6.6% 68.3% $929 $3,100
US 1.1% 2.6% 4.6% 1.9% 1.6% 7.2% 11.2% $25,966 $37,016
    Vietnam as % of US 91.7% 609.8% 3.6% 8.4%
World 1.3% 3.4% 6.0% 1.9% 2.0% 17.5% 27.2% $6,759 $10,714
    Vietnam as % of world 37.7% 251.1% 13.7% 28.9%
a. Would you consider Vietnam to be a "post-1980 globalizer" or not? How did you decide?
b. Does any of the evidence in the table offer possible support for the Factor Price Equalization theorem? How did you decide?
c.  Vietnam's top three exports are clothes, shoes and fish products. Its leading imports include machinery and equipment, electronics, plastics and automobiles. Would you consider this pattern of trade to be consistent with the Heckscher-Ohlin theorem? How did you decide?
  d. In 2009, Vietnam's Current Account Balance (CAB) was a -$7.4 billion, amounting to 8.2% of its GDP. Do you consider Vietnam's CAB to be consistent with the basic economic model of capital migration? Explain.
 

8. 

As always, don't forget to staple your work.