Vietnam National University Ho Chi Minh City
University of Economics and Law
Faculty of International Economics
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GROUP 2 ASSIGNMENT
SUBJECT : INTERNATIONAL ECONOMICS
Student’s class : K234082E
Course code : 241ERE20312
Lecturer : Ngô Quỳnh Trang
Ho Chi Minh City, October 2024
Group members contribution
Full name Student ID Contribution Task
Nguyễn Lê Nhật Vy K234080928 100% Ex 3 hw 2
Nguyễn Thuỷ Linh K234080900 100% Ex 2 hw 2
Đinh Thị Minh Thắm K234080919 100% Ex 1 hw 2
Phạm Thiều Mỹ Ý K234080930 100% Ex 4 hw 1
Trần Kim Khánh K234080898 100% Ex 3 hw 1
Nguyễn Thị Cẩm Tiên K234080879 100% Ex 1 hw 1
Nguyễn Ngọc Khánh Lam K234080899 100% Ex 2 hw 1
A. HOMEWORK 1
Question 1: Given the following table
Production per hour US UK
Wheat 6 1
Cloth 2 4
Analyze the basis, model, and trade benefits of the two countries participating in
international trade, determine the exchange rate framework, and demonstrate the
benefits by using a specific ratio (using the theory of absolute advantage).
Answer
Basis of Trade: Absolute advantage
According the given information, we have: 6 > 1
4>2
➔ US has an absolute advantage in Wheat.
➔ UK has an absolute advantage in Cloth.
Trade model:
• US exports Wheat and imports Cloth.
• UK exports Cloth and imports Wheat.
Trade benefits:
• US trades when: 6W > 2C
• UK trades when: 4C > 1W
Exchange rate framework: 2C < 6W < 24C
1W < 4C < 12W
For example, exchange rate: 6W = 12C
After trade US gains 10C → Saving 5h
UK gains 3W → Saving 3h
Question 2: Explain why the hypothesis "labor only works in that country, without
movingto another country" (no labor export) is necessary for the new trade model to
operate?
This hypothesis is necessary for several reasons:
1. Trade Based on Product Differentiation: New trade models, particularly those
introduced by Paul Krugman, emphasize trade driven by product
differentiation rather than comparative advantage. These models assume that
countries can specialize in producing different varieties of similar products
(like cars, electronics, etc.) and trade these differentiated goods. If labor were
mobile across borders, the specialization of industries in different countries
would be harder to maintain.
2. Market segmentation: When labor cannot move freely between countries, it
creates distinct labor markets in each country. This segmentation is crucial for
the model to capture differences in factor endowments and production
capabilities across nations.
3. Wage differentials: Labor immobility allows for persistent wage differences
between countries. These differences are a key driver of comparative
advantage in the model, influencing patterns of specialization and trade.
4. Trade as a substitute for factor mobility: The model treats international trade in
goods as a substitute for the movement of factors of production (including
labor). This allows the model to focus on how trade can equalize factor prices
across countries without actual factor movement.
5. National identity of firms: Labor immobility helps maintain the national
identity of firms, which is often important in new trade models that consider
imperfect competition and strategic trade policy.
6. Simplification of analysis: Assuming no labor mobility simplifies the analysis
by eliminating the need to model complex migration dynamics and their effects
on wages and production.
7. Policy implications: The assumption allows for clearer analysis of how trade
policies affect domestic labor markets and welfare, without the complicating
factor of labor outflows or inflows.
Question 3:
12 8
a) - Trade basis : > 4 => US has a comparative advantage in Wheat (W)
2
UK has a comparative advantage in Cloth (C)
- Trade mode:
US exports Wheat, imports Cloth
UK exports Cloth, imports Wheat
- Trade benefit:
US trade when 12W > 8C
UK trade when 4C > 2W
Exchange rate framework: 8C < 12W < 24C
2W < 4C < 6W
b) Set the exchange rate: 6W = xC
US gain: (x-2)C
UK gain: (24-x)C
x-2 = 24-x
x = 13
So, at the ratio of 6W = 13C, trade interests of the 2 countries are equal
Question 4:
After devaluation: 1 British pound = 1.1 USD (meaning the U.S. dollar is weaker).
● When the U.S. dollar weakens, U.S. goods become cheaper for British buyers
because:
1 sack of wheat that used to cost 5 pounds now costs only 4.54 pounds.
1 meter of cloth that used to cost 4 pounds now costs 3.63 pounds.
=> U.S. exports will increase.
● However, UK goods become more expensive for U.S. buyers because:
1 sack of wheat that used to cost 3 USD now costs 3.30 USD.
1 meter of cloth that used to cost 6 USD now costs 6.60 USD.
=> U.S. imports will decrease.
In conclusion, devaluing the dollar helps increase exports and reduce imports,
improving the U.S. trade balance.
B. HOMEWORK 2 :
Question 1:
Cost
Product
UK US
Shoes £6 $24
Milk £2 $4
a,
The opportunity cost of shoes and milk in the UK and the US:
(OCs)uk = 6/2 = 3 (OCs)us = 24/4 = 6
(OCm)uk = 2/6 = 1/3 (OCm)us = 4/24 = 1/6
- UK has a comparative advantage in producing shoes because 3 < 6
- US has a comparative advantage in producing milk because ⅙ < ⅓
b,
(OCs)uk = 7,5
$/£ = 3
Price of shoes in the US = £7.5×3 = $22.5
Price of milk in the US = ⅙ × $22.5 = $3.75
Price of milk in the UK = $3.75/3 = £1.25
Question 2 :
Singapore and Vietnam produce computers and rice with increasing opportunity
costs. Both countries have the same PPF. The ratio of Singapore's consumption of
rice to computers is lower than that of Vietnam, irrespective of the price ratio
between the two products.
a, In a state of autarky, which country has a lower (comparative) price for
computers?
- We assign R to consumption of rice & C to consumption of computers
-> So, we have:
-ratio of Singapore's consumption of rice to computers is R1/C1
-ratio of Vietnam's consumption of rice to computers is R2/C2.
These fractions are also the opportunity costs of computers in Singapore and
Vietnam, simultaneously.
- According to the provided information: R1/C1 < R2/C2, which means that the
opportunity cost of computers in Singapore is lower than that in Vietnam and
Singapore has a comparative advantage in producing computers. Since opportunity
cost implies the price of the products, we can claim that Singapore has a lower price
for computers in a state of autarky.
b, With trade, which country will export computers and rice?
- With trade, Singapore will export computers and Vietnam will export rice.
->Because Singapore has a comparative advantage in producing computers and
Vietnam has a comparative advantage in producing rice. When two countries trade
goods with each other, the country with a comparative advantage in producing a
particular good will specialize in producing that good and export it to the other
country. The country with a comparative advantage in producing the other good will
specialize in producing that good and import it from the other country.
c, What happens to the production structure of Vietnam and Singapore?
->With trade, the production structure of Vietnam and Singapore will change.
Singapore will produce more computers and less rice, while Vietnam will produce
more rice and less computers. This is because both countries specialize in producing
the goods that they have a comparative advantage in producing. Trade will benefit
both Vietnam and Singapore. Singapore will be able to consume more computers at a
lower price, and Vietnam will be able to consume more rice at a lower price.
Question 3 : Given the table as follows:
Cost
Product Country 1 Country 2
Labor Capital Labor Capital
X 10 5 10 5
Y 2 4 2 4
w/r 3/2 1/2
w - wages; r - interest rate
a, Determine the factor intensity of the two products and the factor abundance of the
two countries.
b, Determine the trade model under free trade.
c, When trade occurs, how will the comparative factor price (r1/w1) change in
country 1?
d, If the government of country 1 imposes a tax on imported products from country 2,
how will the comparative wage rate in country 1 change?
e, Assuming country 1 is a small country under conditions of free trade. Suppose the
supply of capital in country 1 increases, what will happen to the output of products X
and Y in country 1.
a) Factor intensity :
Product X is labor intensive : 10 / 5 = 2
2 / 4 = 0.5
Product Y is capital intensive : 5/10 < 4/2
Factor abundance :
Country 1 is capital surplus ( has a higher ratio of w/r : 3/2 )
Country 2 is labor surplus ( has a lower ratio of w/r : 1/2 )
b) Trade model under free trade
o Country 1 (capital surplus) will specialize in
producing Product Y
o Country 2 (labor surplus) will specialize in
producing Product X
Country 1 will export Y and import X from country 2
c) In Country 1, labor is abundant, this leads to an increase in the relative wage
rate (w1), and the interest rate (r1) will decrease.
Therefore, the r1/w1 ratio will decrease in Country 1.
d) If the government of country 1 imposes a tax on imported products from
country 2, it will increase the price of imported goods ( Product X )
The comparative wage rate in Country 1 will increase due to the higher
demand for labor resulting from the tax on imports.
e) Assuming country 1 is a small country under conditions of free trade. Suppose
the supply of capital in country 1 increases will shift the PPF curve outwward
which lead to :
- The output of product Y will increase
- The output of product X will relatively decrease.
