Name: Awais Dastgeer Course Name: International Trade ID: LY2020031

QUESTION No 1

Suppose that France has a trade surplus with the United Kingdom. What would you expect
to happen to prices, wage, and commodity prices in France? Why? What would happen to
the terms of trade between the two countries?
Answer
Trade surplus means that:
EX > IM
Net inflow of specie
Increase in money supply
Increase in price and wages
Increase IM and decrease EX
EX=IM → zero trade balance
Depend on space flow mechanism
According to the price-specie-flow mechanism, these gold movements will result in an increase
in prices and wages in France and a decrease in prices and wages in the United Kingdom.
Because the demand for traded goods is assumed to be price-elastic, this will cause the
expenditures for U.K. goods by France to rise and the expenditures for French goods by the
United Kingdom to fall. These adjustments will take place until trade is balanced. The changes
in prices in the two countries will lead to a change in the terms of trade that will move them
closer to those of the United Kingdom in autarky, i.e., the terms of trade will deteriorate for the
United Kingdom and improve for France.

QUESTION No 2

Answer

Consider the following classical labor requirements:

Shoes Wine

Italy 6 hr/pr 4 hr/gal

Switzerland 8 hr/pr 4 hr/gal

(a) Why is there a basis for trade?
Italy has Absolute Advantage in produce shoes. So, there is basis for trade.
(b) With trade, Italy should export Shoes and Switzerland should export Wine because
Italy has Absolute Advantage in Shoes.

(c) The international terms of trade must lie between 1S:1.5W and 1S:2W.

(d) If the wages rate in Italy is €4/hr, and the exchange rate is 1franc/€1, what are the
commodity terms of trade?

Shoes Wine
Wage Rate
Labor Price Labor Price

Italy 4 €/hr 6 hr 24 € 4 hr 16 €

Switzerland 3.5 £ 8 hr 28 £ 4 hr 14 £

a1jw1e < a2jw2

For Shoes:
6*4*1/1<8*3.5

24<28

 Conclusion: Italy will export shoes

For Wine:
4*4*1/1<4*3.5

16<14

 The result: Switzerland will export wine

The term of trade will be:

1W:0.6S

1S:24/14W →1S:1.7W
QUESTION No 3

In the example in Question 2, what are the limits to the wage rate in each country, other
things being equal? What are the exchange rate limits?

Answer

w1=a2j∗w2
a1j∗e

8∗3.5
w1= 6∗1/1 = 28
6
= 4.5 Shoes

w2=a1j∗w1∗e
a2j

w2= 6∗4∗1/1
8
= 3 (3 , 4.7)

------------

4∗3.5
w1= 4∗1/1 = 14
4
= 3.5 wine

w2= 4∗4∗1/1
4
= 4

------------

e= a2j∗w2
a1j∗w1
, e= 8∗3.5
6∗4
= 1.2 price of wine equal Shoes

e= 4∗3.5
4∗4
=14
16
0.9 price of shoes equal Wine (0.9, 1.2)
 Question No 4

If the following three commodities are included in the example in Question 2, what will
the export and import pattern be? will your answer change if a transportation charge of
1 hour/commodity is taken into consideration? Why or why not?

Clothing Fish Cutlery

Italy 9 hr/unit 3 hr/unit 16 hr/unit

Switzerland 10 hr/unit 2.5 hr/unit 15 hr/unit

------

Shoes Wine Cloth Fish Cutlery

Wage
(labor) (labor) (labor) (labor) (labor)

Italy 4 €/hr 6 hr 4 hr 9 hr 3 hr 16 hr

Switzerland 3.5 £/hr 8 hr 4 hr 10 hr 2.5 hr 15 hr

Shoes Wine Cloth Fish Cutlery

Wage
(labor) (labor) (labor) (labor) (labor)

Italy 4 €/hr 6 hr 4 hr 9 hr 3 hr 16 hr

0.75 1 0.9 1.2 1.1

Switzerland 3.5 £/hr 8 hr 4 hr 10 hr 2.5 hr 15 hr

 cloths are non-traded

 fish are non-traded
 wine is non traded
 shoes are in the limit
 cutlery will be traded
 the international trade will be between shoes and cutlery.
Another solution :

Wage rate Shoes Wine Cloth Fish Cutlery

Italy 4 €/hr 6 hr 4 hr 9 hr 3 hr 16 hr

Price 24 € 16 € 36 € 12 € 64 €

Italy (1£=1€) 24 £ 16 £ 36 £ 12 £ 64 £

price 28 £ 14 £ 35 £ 8.75 £ 52.5 £

Switzerland 3.5 £/hr 8 hr 4 hr 10 hr 2.5 hr 15 hr

comparing the prices

shoes in Italy < Shoes in Switzerland
so, Italy will Export shoes
the same in wage compare.
(2)

Shoes Cloth Wine Cutlery Fish Wage rate

Italy 6 +1=7 hr 10 4 1.7 4 4

0.87 1 1 1.13 1.6 0.857

Switzerland 8 hr 10 hr 4 hr 15 hr 2.5 hr 3.5 £/hr

QUESTION No 5

In the following two-goods, multicounty example of labor requirement, do all the countries
stand to gain from trade if the international terms of trade are 1 lb fish:0.5 bu potatoes? If
these commodities are not exported or imported, why not

fish Potatoes

Poland 3 hr/lb 5 hr/bu

Denmark 1 hr/lb 4 hr/bu

Sweden 2 hr/lb 2 hr/bu

fish Potatoes Autarky

Denmark 1 hr/lb 4 hr/bu 1F:0.25P

Poland 3 hr/lb 5 hr/bu 1F:0.6P

Sweden 2 hr/lb 2 hr/bu 1F:1P

 Poland has gain from export fish and import potatoes.

 Sweden has gain from export fish and import potatoes
 Denmark has gain from export potatoes and import fish.