Topic 1: Introduction to Trade

Question 1

Through what mechanisms can there be gains from trade?

Answer 1

• Comparative advantage.
• Gains from specialization.
• Learning by doing.
• Variety. (Works on the consumer and producer level.)
• Pro competitive effects. (Evidence is elusive.)
• Technology transfers.
• Macroeconomics aspects.
• Political economy. (Influence on IR.)

Question 2

What have happened to trade costs from 1930 to 2000?

Answer 2

• Sea costs down by 60%.
• Air down by 90%.
• Telecom down by more then 95%.

Question 3

What are the GDP growth rates for developing countries with and without an open economy.

Answer 3

Developing countries with an open economy grew by 4.0% anually on average.

Developing countries with a closed economy grew by 0.7% anually on average.

Question 4

Consider an economy of two workers, who produce cotten and wool respectively. Show the outcome when they only trade with each other.

Answer 4

Note that the consumption of wool and cotten for both individuals adds up to the production for the economy.

Question 5

Consider an economy of two workers, who produce cotten and wool respectively. Show the change in outcome when their economy is ‘opened’.

Answer 5

Because the international relative price pw/pc is higher, the wool farmer can now achieve a higher level of utility. The cotten farmer however no longer has the previous terms of trade avaliable to him (the wool farmer wouldn’t trade at that rate if he can get a better deal internationally). So the cotten farmer has to settle with the terms of trade that gives them a lower utility level.

Question 6

What is the connection between trade and technological change?

Answer 6

Like trade, technological change makes jobs obsolete, changing the opportunity cost of various goods in the economy.

Social attitudes however are very different - there is much less sympathy towards resistance against technological change.