Econ 460 exam 1

trade balance

exports-imports

trade surplus

(exports-imports)>0

trade deficit

(exports-imports)<0

how to determine which country has absolute advantage in an item

if it’s MPL for that item is greater than the other country’s; or you could compute total units of that item (output per worker * # of workers)

how to determine which country has a comparative advantage

calculate OC; the country with the lower OC has the comparative advantage in that item

how to calculate OC

look at output per worker for x and y; divide x and y by x to find OCx and then OCy is reciprocal of OCx

ricardian model ppf

axes good x and y; ppf line is MPLx/MPLy aka Px/Py; y intersection is (output per worker of y * # of workers) and x intersection is (output per worker of x * # of workers); autarky point is where IC is tangent to ppf

terms of trade line

if Country A chooses to specialize in good x, then quantity of x increases while quantity of y is the same; for ex- tot is 1y=3x, then plug in # of y into tot and get # of x after specialization

trade triangle after specialization

start with original ppf graph and autarky point; add tot line; trade triangle is (consumption point), (production point: y-intercept because y is the good we are not specializing in in this example)

trade triangle exports and imports

exports- axis you did NOT specialize in; imports- axis you DID specialize in

the chart used to figure out consumption

production (you only produce one good, so other good =0); trade (tot, you -export your specialized good and +import other good); consumption (total up production and trade for each good)

country one should export good j if

(a_1j)(W₁)(e)<(a_2j)(W₂)

for (a_1j)(W₁)(e)<(a_2j)(W₂), e is

country 1’s exchange rate: # of country 2’s currency units for 1 unit of country 1’s currency

for (a_1j)(W₁)(e)<(a_2j)(W₂), a_1j and a_2j are

the labor requirements (hours needed) to produce good j in countries 1 and 2

relative wage, formula and how to interpret

(W₁e)/(W₂); workers in country 1 earn ((W₁e)/(W₂)) times the wage in country 2 when wages are in the same currency

a_2j/a_1j represents

relative labor requirement in country 2 and relative worker productivity in country 1

relative labor requirement interpretation

country 2 requires (a_2j/a_1j) times as much labor hours as country 1 to produce the same amount of j

relative worker productivity interpretation

country 1’s workers are (a_2j/a_1j) times as productive at making good j, compared to country 2 (if country 2 needs x times more labor to make something then country 1 is x times more productive at making it)

trade will stop if (formula)

W₁e/W₂ = a_2j/a_1j AKA (W₁)(e)(a_1j) = (W₂)(a_2j) because the cost of producing j is the same in both countries

calculating wage and exchange rate limits

use the (W₁)(e)(W₂) = (a_2j)(a_1j) formula and for W₁ keep everything else constant; for W₂ keep everything else constant; for e keep everything else constant

transportation cost (note to self)

if importing country bearing cost of transportation, then we add transportation charge to exporting country; we are adding the charge to the exporting country’s production cost in order to calculate the importing country’s total cost of getting the good;

multiple countries

calculate OC for each country; for the country in the “middle” we need TOT, if TOT > OCx then that country will export x and vice versa

ppf neoclassical model

goods x and y on axes; ppf line is a quarter circle; autarky line is Px/Py; E and IC occurs at tangency of autarky price line and ppf

steeper tot in neoclassical model

if relative price of a good is less in country x than country y, then country x will export that good; tot line is steeper and the tangency of tot and ppf is P (production point); C (consumption point) will be on the tot line but above E;

review graph on exercise 3b

note to self

ppf specific factors

similar to neoclassical; axes M on x and A on y; autarky price line Pm/Pa; autarky point at tangency to autarky price and ppf, this is also where tangent IC is;

specific factors labor market

employment on x and wage on y; left to right is manufacturing labor to agricultural labor; upward and cu is Pa*MPLa; downward and cu is Pm*MPLm; intersection of these is labor market equilibrium

if Pm increases and Pa doesn’t change

MPLm shifts up, labor in M rises and A falls; MPk rises because each machine has more labor to work it; so real rental rate of capital rises; MPt falls because there are less workers for each acre of land; so real rental rate of land falls; nominal wage rises for both; real wage manufactured goods falls; real wage agriculture increases

effect of rental on capital

∆R_K/R_K = [((∆P_m/P_m)P_mQ_m) - (∆w/w)wL_m] / (R_KK)

effect of rental on land

∆R_T/R_T = [((∆P_A/P_A)P_AQ_A) - (∆w/w)wL_A ]/ R_TT

(a_1j)(W₁)(e) and (a_2j)(W₂) represent

per unit labor cost in country 1 and country 2, respectively

effect on real wage

if P_m rises then real wage (W/P_m) falls because even though nominal wage W rises, it changes less than the change in P_m, so the increase in P_m outweighs increase in W, causing W/P_m to fall