GS 29281 Fall 2014

International Trade Professor Bae

Problem Set 1
(due Wednesday, Sep 24)

1. Many firms in Korea have begun outsourcing work to China or other

countries. Why have large firms done this? Is outsourcing work to low-
wage Chinese or other countries’ workers a risk-free proposition for large
firms? Are they rational?

2. FRS recently instituted an in-house recycling program. The benefits of

this program include not only the environmental benefits of recycling
but also the goodwill generated by FRS’s leadership in this area. The
costs of recycling include all of the energy, labor, and space required to
do the recycling. Suppose these benefits and costs are given by B(Q) =
100Q − 2Q2 and C(Q) = 2Q. (Note that M B = 100 − 4Q, and M C = 2.)

a. What level of Q maximizes the net benefits of recycling?

b. Calculate the net benefits, using the Q obtained in a.
c. Choose an arbitrary value of Q other than Q obtained in a. (i.e.,
Q = 20 or 40.) Then, calculate the net benefits. What level of
recycling is optimal? (Q = 20, 40, the Q you choose, or Q in a?)

3. Suppose a country produces two goods: corn and cars. New technology
is developed that increases the amount of corn that can be produced.
Use a graph to show the effect of this graph on the country’s production
possibility frontier. Explain what occurs in the graph.

4. Visit the website: http://data.worldbank.org. Click on the link, “The

WITS: World Integrated Trade Solution.” Choose a country of your in-
terest, such as Korea. Describe the country’s international trade features
and characteristics. Your answer should include (1) a trade summary, (2)
the top trading partners and their trade volumes, (3) product groups, and
(4) other trade indicators.

1
 Note: Please do not simply copy and paste data or figures. Explain them
in your own words.

5. Visit the above website again. Find the evidence to answer if the following
statements are correct:

a. The gravity model explains why trade between Sweden and Ger-
many exceeds that between Sweden and Spain.
b. The gravity model suggests that over time the value of trade be-
tween two countries will be proportional to the product of the two
countries’ GDP.
c. The two neighbors of the United States do a lot more trade with
the United States than with European economies of equal size.