GS 29281 Fall 2020

International Trade Professor Bae

Assignment 1
Solution

1. N/A.

2. N/A.

3.

a.
ln(Tij ) = ln(A) + αln(Yi ) + βln(Yj )
+γln(Dij ) + δln(T imeij ) + ϵln(Landlockedij ) + ln(εij ).

′ ′ ′ ′
Let ln(Tij ) = Tij , ln(Yi ) = Yi , ln(Yj ) = Yj , ln(Dij ) = Dij , ln(T imeij ) =
′ ′ ′
T imeij , ln(Landlockedij ) = Landlockedij , and ln(εij ) = εij . Then,
the equation becomes

′ ′ ′ ′ ′ ′ ′ ′
Tij = A + αYi + βYj + γDij + δT imeij + ϵLandlockedij + εij .

where, α > 0, β > 0, γ < 0, δ < 0, and ϵ < 0.

b.
α : If Country i’s GDP increases by 1%, then the trade volume
increases by 0.3%.
β : If Country j’s GDP increases by 1%, then the trade volume
increases by 0.5%.
γ : If the distance between two countries increases by 1%, then
the trade volume decreases by 0.2%.
δ : If Countries i and j’s border crossing time increases by 1%,
then their trade volume decreases by 0.4%.
ϵ : If either Country i or j is landlocked, then their trade volume
decreases by 0.1%.

1
 c.
(1) Linguistic and/or cultural affinity. (+).
(2) Historical ties between them. (+).
(3) Multinational agreement between countries, such as FTAs. (+).
(4) Tariffs. (−).
(5) Corruption. (−).

4.

a. Wage
rate

800
@
@
@
@
@ M P LF · PF
@
@ A
@ A
@ A
@ A 400
@ AU
 

@ M P LC · P C
  @
 @
200  @
@
@
@
@
@
0 40 L
C

b. M P LC · PC = M P LF · PF =⇒ (80 − 2LC ) · 10 = (40 + LC ) · 5.

=⇒ 800 − 20LC = 200 + 5LC .

Solving for LC , L∗C = 24, L∗F = 16, and w∗ = $320.

2
c. Using the equilibrium condition, (80 − 2LC ) · 11 = (40 + LC ) · 5.5,

=⇒ 880 − 22LC = 220 + 5.5LC .

Thus, L∗∗ ∗∗
C = 24, LF = 16, and w
∗∗
= $352.

d. Using the equilibrium condition again, (80−2LC )·12 = (40+LC )·8,

=⇒ 960 − 24LC = 320 + 8LC .

Thus, L∗∗∗ ∗∗∗

C = 20, LF = 20, and w
∗∗∗
= $480.