EC1111 - International Economic Policy RHUL - Fall 2014 Vinay P. Nundlall Seminar 1 - Suggested Solutions Prepare and be ready to discuss the questions below. 1. Analyse the different criteria which can be used to compare countries globally. We can look at land size, population size, or GDP. Ultimately, in the study of economics, we end up comparing GDP per capita, which is GDP divided by population. 2. After World War II, the volume of trade has increased dramatically between developed and developing countries. What are some factors that explain this surge in trade between countries at different stages of development? Fixing the exchange rate of currencies at the Bretton Woods Agreement eliminated volatility in rates and thus, risk in trading with foreign countries. Further, the end of the war itself allowed countries to concentrate on manufacturing and trading consumer goods instead of weapons. The biggest cause of increased trade was the GATT (General Agreement on Tariffs and Trade) which actively sought to eliminate barriers to trade. The GATT was later replaced by the World Trade Organisation (WTO) Do you feel that this type of trade is beneficial for developing countries? Why? This is a big debate. It seems the answer is YES as it allows smaller nations to specialise in production of a few goods that they can export and become more wealthy. Anti-trade activists claim that expansion in trade is bad for the environment and allows big corporations from rich countries to exploit poor nations (eg destruction of the environment, child labour, low wages ... ) 3. A simplified economic system consists of only two countries: A and B. In a given year, Country A has one million units of labour available, while Country B has two million. The table below shows the maximum amount of a particular good that each country can produce in a year if all its labour is employed in that sector.
Country Maximum Possible Quantity of Goods Produced per Sector (in thousandsff Cars 500 Computers A 200 B 400 250 a. Will any country specialize in the production of any good? First we need to calculate how efficient each country is in production. So we need to find the Unit Labour Requirement (ULR) in each sector. Country ULR Cars Computers A 2 5 B 5 8 From the productivity table, we see that Country A is more efficient at producing both Cars and Computers. Country A has absolute advantage in both sectors. However, let us look at the notion of comparative advantage. Country A is 2.5 (5ffi2) times more efficient than Country B in the car sector. Country A is 1.6 (8ffi5) times more efficient than Country B in the computer sector. Therefore, Country A is comparatively more efficient in the car sector (2.5 > 1.6). So Country A should specialise in the car sector Country B should specialise in the computer sector b. Will Country A and Country B trade? As the two countries are specializing in different products, yes they