2.1

Question 1

what is a GVC (global value chain)

Answer 1

the value added of all activities that contribute directly or indirectly to a final good or service (and the activities’ global distribution)

Question 2

what factors influence trade

Answer 2

cultural affinity (language for ex),
geography (access to sea, no mountain barriers),
political factors,
technological improvements (in transportation and transmission of information)

Question 3

critique of ricardo’s trade theory

Answer 3

only labour as factor of production not capital or land

Question 4

what is the conclusion of ricardo’s trade theory

Answer 4

concluded it would still be advantageous to both countries to engage in trade even though one country had an absolute advantage in the production of both goods

Question 5

what is the setting of ricardo’s trade theory

Answer 5

2 countries
labour only factor of production completely immobile internationally, completely mobile btw. sectors,
wages determined in national labour market,
technology fixed and differs btw. countries,
no transport costs,
perfect competition

Question 6

what does ac or af mean in ricardo’s trade theory

Answer 6

labour hours needed per unit of cloth (food)

Question 7

what does production of both products under autarky require in ricardo’s trade theory

Answer 7

Wc=Wf=W,
if Wc>Wf only cloth would be produced,
if Wc

Question 8

given constant returns to scale what is the amount of cloth produced under autarky in ricardo’s trade theory

Answer 8

Qc = (1/ac)Lc,
Qc: total units of cloth
ac: labour hours needed per unit of production of cloth
Lc: labour involved in production of cloth

Question 9

what is the marginal product of labour in terms of cloth under autarky in ricardo’s trade theory

Answer 9

Qc = (1/ac)Lc,
so MPLc = APLc = 1/ac,
Qc: total units of cloth
ac: labour hours needed per unit of production of cloth
Lc: labour involved in production of cloth

Question 10

what does the perfect competition assumption mean for the price under autarky in ricardo’s trade theory

Answer 10

wc=pcMPLc -> wc=pc/ac,
pc=acwc,
ac: labour hours needed per unit of production of cloth
wc: wages earned in cloth sector
pc: price of one unit of cloth

Question 11

since under autarky both goods must be produced, wc=wf=w what determines the price of each good

Answer 11

pc/ac=pf/af,
p = pc/pf = ac/af,
ac: labour (hours) needed per unit of production of cloth,
pc: price of one unit of cloth,
relative price of cloth is determined by technology

Question 12

what does autarky production of both goods leading to p = pc/pf = ac/af imply

Answer 12

the greater the difference in terms of the labour input required, the greater the price difference between pc and pf,
ratio ac/af nothing but the opportunity cost of C unit in terms of F

Question 13

what is the full employment equation under autarky producing both goods

Answer 13

L=Lc+Lf,
L=acQc+afQf,
ac: labour (hours) needed one unit cloth,
Wc: total units of cloth produced

Question 14

what does the PPF look like under autarky producing both goods

Answer 14

straight line with gradient the relative ac/af,

opportunity cost of producing C in terms of F

Question 15

for two country ricardian model, what equation satisfies home to have a comparative advantage even if foreign has absolute advantage on both,
ac=1/2ac, af=1/3af

Answer 15

ac/af>3/2ac/af home has a comparative advantage in c-making over foreign,
ac/af>ac/af home has comparative advantage in C-making

Question 16

what is it that determines comparative advantage

Answer 16

it is the ratios that determine not the absolute values

Question 17

ricardo’s great insight

Answer 17

both countries should specialise in the production of the good in which they have a comparative advantage

Question 18

if countries are to completely specialise in production of one good then what will the relative price of cloth after trade (pt) be

Answer 18

between the relative prices under autarky,
p>pt>p,
these are relative prices:
home: p=pc/pf=ac/af,
when ac/af>ac/af then p>p, if home has comparative adv. in c-making its relative price of c under autarky will be lower than foreign’s

Question 19

what happens to wages after the countries start trading

Answer 19

prices will still reflect mg costs,
pt=ptc/ptf=acwtc/afwtf and pt>p=ac/af,
then wtc>wtf
after trade, home only make c bec. wages in this sector now greater than in f sector

Question 20

what is the world relative supply of cloth

Answer 20

qs=Qc+Qc/Qf+Qf

Question 21

what would happen if pt

Answer 21

no country would produce C, so qs=0

Question 22

what would happen if ac/af

Answer 22

there will be complete specialisation and
qs=(L/ac)/(L/af),
home move production towards cloth and now commands a higher price

Question 23

what are the gains from trade due to specialisation

Answer 23

both countries gain bec. trade expands consumption possibility set beyond own PPF,
bec. world production now greater than before,
greater the change in relative prices, the greater the gains from trade

Question 24

what determines prices for trade

Answer 24

p=MC=acw and pf=afw,
two reasons why prices may be high,
high wages and low productivity

Question 25

what is the implication for wages and prices given fixed productivity levels ac (af)

Answer 25

p=mc=acw (afw),

since productivity fixed (by assumption), nominal prices and nominal wages always move in the same direction

Question 26

what is the equation for a workers’ productivity

Answer 26

q=1/acL,
q/L=1/ac,
so if one worker in one time period their productivity is 1/ac

Question 27

average productivity of labour equation APL

Answer 27

APL=1/a

Question 28

if APLc=1 and APLc*=10 what does the wage need to be in order for home to be competitive in C-making

Answer 28

wt

Question 29

does trade exploit workers of poor countries

Answer 29

national wages are determined in a national market and will reflect average national productivity

Question 30

is foreign competition unfair and hurts the home country when it is based on low wages

Answer 30

no, existence of gains from trade do not depend on absolute wages, workers can earn a lot more from factories than farming for example

Question 31

what is A(z) in international trade

Answer 31

Home’s relative productivity in good z with 1 factor and CRS,
A(z)=(1/a(z))/(1/a(z))=APLz/APLz

Question 32

what is ω

Answer 32

ω is home’s relative wage,

ωt=wt/w*t

Question 33

why is the RS upward sloping in home’s relative wage and what is its equation

Answer 33

x goods
y relative wages of home/foreign,
upward sloping because the more goods a country produces the higher the income,
ωt=(1/((1/z)-1)L/L

Question 34

technology being the same what does higher wages mean

Answer 34

less competitive you will be so less products produced internationally

Question 35

what is A(z)

Answer 35

ratio of home’s average productivity of labour compared to foreign,
A(z)=(1/a(z))/(1/a(z))=APLz/APLz

Question 36

why would an increase in productivity lead to more demand for products form that country

Answer 36

productivity can be matched by increase in wages but as long as the increase in wages is less than the productivity increase then the good will be relatively cheaper

Question 37

where do high wages come from

Answer 37

productivity differences determine relative wage differences across countries

Question 38

what can low productivity can be offset by?

Answer 38

low wages

Question 39

what does Krugman (1997) say

Answer 39

transfer of technology and capital from high wage to low wage countries and the resulting growth of labour intensive third world exports