Seminar 6 (questions)

1. “An increase in the country’s labor force will result in an increase in the quantity produced
of the labor-intensive good, with no change in the quantity produced of the other good.” Do
you agree or disagree? Why? In your answer, use the logic of the Rybczynski theorem.

2. Several Southeast Asian countries export palm oil and import other goods. A long-term
drought now reduces palm oil production in the countries of this region. Assume that they
remain exporters of palm oil. Consider that before the drought, Southeast Asian countries
can export 10 kgs of palm oil and import 2 electronics. However, after the drought they
export 6 kgs of palm oil and import 4 electronics. Explain how the drought affects the terms
of trade for Southeast Asian countries? What is happening to the region’s welfare?

3. The Philippines has been experiencing rapid economic growth, with a real GDP growth rate
of 8% per year. However, due to a significant income elasticity of demand for imports of 1.2,
this growth has led to immiserizing effects. If the country's export volume currently stands at
$100 billion and its imports are valued at $80 billion, calculate the minimum percentage
increase in export volume required to counteract the negative welfare effects of immiserizing
growth.

4. Which of the following can lead to a reversal of the country’s trade pattern (that is, a shift in
which a previously exported good becomes an imported good or a previously imported good
becomes an exported good)? Consider each separately. Explain each.
a. Growth in the country’s total supply (endowment) of the factor that is initially
scarce in the country.
b. International diffusion of technology.
c. Shifting tastes of the country’s consumers.

5. A free-trade equilibrium exists in which the United States exports machinery and imports
clothing from the rest of the world. The goods are produced with two factors: capital and
labor. The trade pattern is the one predicted by the H–O theory. An increase now occurs in
the U.S. endowment of capital, its abundant factor.
a. What is the effect on the shape and position of the U.S. production-possibility
curve?
b. What is the effect on the actual production quantities in the United States if
the product price ratio is unchanged? Explain.
c. What is the effect on the U.S. willingness to trade?
d. Assuming that the U.S. growth does affect the international equilibrium price
ratio, what is the direction of the change in this price ratio?
e. Is it possible that U.S. national well-being declines as a result of the
endowment growth and the resulting change in the international price ratio?
Explain.
6. A free-trade equilibrium exists in a two-region US and Latin America, two-product world.
The United States exports food and imports clothing. A long-term drought now occurs in
Latin America.

a. What is the effect on Latin America’s willingness to trade?

b. Assuming that each region is large enough to influence international prices, how does
Latin America’s drought affect the equilibrium international price ratio?
c. Show on a graph and explain the effect of all this on the following in the United
States: (1) quantities produced of food and clothing, (2) quantities consumed of food
and clothing, (3) U.S. well-being.
d. Which group in the United States is likely to gain real income in the long run as a
result of all this? Which group in the United States is likely to lose real income?

7. A free-trade equilibrium exists in which the United States exports food and imports clothing.
U.S. engineers now invent a new process for producing clothing at a lower cost. This process
cannot be used in the rest of the world.
a. What is the effect on the U.S. production-possibility curve?
b. What is the effect on the U.S. willingness to trade? (Assume that the United States
remains an importer of clothing.)
c. Assuming that the change in the United States is large enough to affect international
prices, will the equilibrium international price of clothing rise or will it fall?

8. A country is initially in a free-trade equilibrium, in which it is producing 40 units of wheat

and 64 units of cloth. The country exports cloth and imports wheat. Growth now occurs in
the country’s production capabilities. If product prices are unchanged, the country will shift
to producing 50 units of wheat and 80 units of cloth.
a. What kind of growth is this?
b. The growth of the country actually causes a change in product prices. In the
new free-trade equilibrium, the country actually produces 52 units of wheat
and 77 units of cloth. Explain what has happened to result in the change from
the initial equilibrium to this new equilibrium.