INTERNATIONAL TRADE

Spring 2023

Due Date: 15th April 2023

HW Assignment 2

1. China primarily exports manufactured goods and imports raw materials such as food, cotton and oil.
Analyze the impact on China’s terms of trade after the following events. Draw graphs wherever relevant.

a. Floods in South Asia disrupt the supply of raw cotton

b. Singapore develops new technology that increases the volume of manufactured goods it exports to
Europe and the United States.

c. Several shale oil reserves are discovered in the United States.

d. A reduction in China’s tariffs on agricultural products

e. An increase in China’s export subsidies on manufactured products

2. Suppose Germany and Bangladesh have two factors of production, capital and labor. They produce
two goods, cars and t-shirts. Technology is the same in the two countries. Production of cars is capital-
intensive and Germany is capital-abundant. Analyze the effects on terms of trade and on the two
countries’ welfare if:

a. An increase in Bangladesh’s labor supply.

b. An increase in Bangladesh’s capital stock.

c. An increase in Germany’s labor supply.

d. An increase in Germany’s capital stock.

3. Do Question 2 and Question 3 from the textbook (KOM, Chapter 8: p 226 (10th ed), p 232 (11th ed))

4. Everyone is better off as a result of integration. Explain why and how to realize these gains. Discuss
how Pakistani policy makers can help improve trade integration.

5. Suppose there are two firms, Firm A and Firm B. Firm A has a higher marginal cost than Firm B. Explain
and shown on a graph why Firm A will not export but Firm B will export. Suppose after trade
liberalization, Firm A increases its overall profits but Firm B is forced to exit the market. Explain this
pattern with the help of a graph on market demand curves and on operating profits after the trade
liberalization episode. Discuss the impact on the average welfare of the country.

6. Suppose the fixed costs to enter the production of super computers is Rs 2 billion and the marginal
cost is Rs 10,000 per unit. With n and b=1/1000. Suppose Region A has 8 million inhabitants and has
Region B has 32 million inhabitants.

a. Write the equation for the price charged by a typical firm. Write down the equation for the number of
firms in terms of total industry output, responsiveness of the firm's sales to its price and the fixed costs.
b. Calculate the number of firms and the market price in Region A and Region B without trade.

c. Calculate the number of firms and the market price after the integration of the two regions.

d. Determine the sales per firm before and after trade.

e. Discuss the impact on market size and competition before and after trade.

Please note: The number of firms may not necessarily be expressed in integers. You may round them up
to two decimal places. One million is written as 1,000,000 (one followed by six zeroes) and one billion is
written as 1,000,000,000 (one followed by nine zeros).

7. Suppose there are three types of firms in an economy that has just allowed free trade, namely, the
winners, the losers and the ones who exit their industry. Suppose the market price is $20 before free
trade and the market price after free trade is $10. In addition, the cost to transport goods abroad is $4
per unit.

a. Determine the maximum marginal cost each of the firms could incur before free trade.

b. Determine the maximum marginal cost each of the firms could incur after free trade.

c. Will a more inelastic demand curve increase the profits of the firms that are likely to benefit from
trade?

d. What is the minimum amount of subsidy requested from the government to export goods if marginal
cost of production is $10 per unit?

8. FDIs can be divided into (1) horizontal and vertical, (2) portfolio investments and Greenfield. Classify
the following cases according to the given parameters.

a. Toyota (a Japanese entity) sets up an automobile assembly plant in Pakistan to directly serve its
customers in Pakistan

Horizontal or Vertical; portfolio or Greenfield

b. Shell purchases minority shares in refineries in North Africa to provide additional petroleum products
to its European customers

Horizontal or Vertical; portfolio or Greenfield

c. Apple establishes a new research and development center in China in order to facilitate its semi-
conductor manufacturers in South East Asia

Horizontal or Vertical; portfolio or Greenfield

d. Pakistan International Airlines purchases shares in luxury hotels in the United States.

Horizontal or Vertical; portfolio or Greenfield

9. What is the optimal tariff rate for a small country and for a large country? Discuss why a large country
may impose a positive tariff rate but a small country may not impose any tariff in order to maximize
their welfare.
10. Suppose a small country can import a good at world price of 5 per unit. The domestic supply of the
good is 𝑆 = 10 + 10𝑃 and demand is 𝐷 = 610 − 10𝑃.

a. What is the domestic equilibrium price?

b. Calculate the total supply and demand if tariff of 10 per unit levied on imports.
Now the world price increases to 45 per unit.
c. Calculate the total supply and demand if an export subsidy of 10 per unit is provided on exports.
d. Discuss the effect on the distribution of income and the deadweight loss from the imposition of a (i)
import tariff and (ii) export subsidy.
11. Suppose China provides significant export subsidies to select industries. As an importer in another
country belonging to one of the industries affected by such trade policy, would you consider such
subsidies to be beneficial or harmful to your profits. Discuss. Further, suppose subsidies were replaced
with import tariffs. How would your opinion change?

12. Suppose the price of a t-shirt in Pakistan after tariff is Rs 1500. However, the price under a free-trade
regime is Rs 1,000. The fabric imported into Pakistan for a t-shirt is Rs 600 and the rest of the cost of
production is labor, which is the only domestic input in production.

a. Calculate the nominal and effective tariff rates.

Now suppose the government increases the costs of fabric to Rs 800 but keeps the price of the t-shirt at
Rs 1,000 as is under the free trade regime.

b. Calculate the effective tariff rates.

13. Using COMTRADE data and the industries (at SITC codes) provided for the term report, list three
industries that observed the largest value of exports from United States of America (USA) and three
industries that observed the largest value of imports into USA in 2021. List the three largest export
destinations and three largest import origins for the industries (all SITC codes) traded by USA in 2021.
Discuss the trading patterns. Does the Heckscher-Ohlin model explain the trading patterns? Do you
believe Stolper-Samuelson and Rybczynski will explain the trading patterns for USA (a simple discussion
will suffice).

14. Using Enterprise Surveys, please calculate the average percentage of sales exported and average
percentage of sales imported by exporters and importers respectively for industries in countries
selected by your group for your term paper. Considering the size of the firm (number of employees), do
you find that firms which trade internationally are likely to be larger than their counterparts? Do an
analysis for firms that export, firms that import and firms that export as well as import. (Note: If your
industry does not have any exporters and/or importers, you may skip the relevant part.).

15. Using WITS, determine the average tariff rates (tariff using UNCTAD-1 approach) imposed by the
United States on imports from Pakistan in 2020 and 2021 (or latest years) for industries assigned to you
for the term paper. Also determine the average tariff rates imposed by Pakistan on imports from India
and China for the industries assigned to you. Discuss the trend.