International Trade Theory and Policy

International Trade Theory and Policy custom essay

International Trade Theory and Policy

Homework 3

Q2 (20 points): Suppose that the wage ratio of skilled labor v.s. unskilled labor, wH/wL, is higher at home than at the foreign country and that production involves four stages/tasks, namely, R&D, marketing, components, and assembly ordered from the most skill intensive to the least skill intensive. Now consider a sharp increase in trade costs for shipping components and final goods between the two countries.

(a)          Use a relative skilled-labor demand- and supply-curve graph to show the effect of increased trade costs on home country’s wH/wL.

(b)          Use another relative skilled-labor demand- and supply-curve graph to show the effect of increased trade costs on foreign country’s wH/wL.

Your answer:

Q3 (20 points): Suppose the wage ratio of skilled labor v.s. unskilled labor, wH/wL, is highest in country A, intermediate in country B, and lowest in country C, and country C’s production involves two stages/tasks, the skilled-labor intensive R&D and the unskilled-labor intensive components.


(a) To which country should country C offshore its component production so that country C’s output is maximized?

(b) Use a PPF-indifference curve graph with components on the X axis and R&D on the Y axis to show the gains from offshoring for country C in the above case. In the graph, identify the amount of R&D exports and component imports.

(c) How will the gain from offshoring change if country C offshores its component production to the other foreign country?

(d) Please discuss some other effects of offshoring that are not reflected in the graph.

Q4 (40 points): Using a domestic-market demand- and supply-curve graph,

(a)          show the impact of tariff on a large country’s import price, domestic demand, domestic supply, import quantity, consumer surplus, producer surplus, government revenue, and total welfare;

(b)          Identify the country’s terms-of-trade welfare gain in your graph. How should you calculate the size of the terms-of-trade welfare gain?

(c)           Is the country unambiguously better off as a result of the tariff? When would the country be unambiguously better off?

(d)          In the same graph, show how to achieve the same import quantity with an import quota;

(e)          When would the tariff and the import quota lead to the same amount of welfare change?

Your answer:


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