Economic Aspects of the International Relations

The country may have no choice but to make products for which it has a comparative disadvantage. Other factors such as trade agreements, tariffs, political harmony etc. between the two countries must be taken into account. b. A country engaging in trade according to the principles of comparative advantage gains from trade because it is producing exports using fewer labor units. False: Labor abundance doesn’t necessarily factor into the synergistic production means of two countries making use of comparative advantage.

There are many factors such as the seasonal weather changes in the production of crops or the latitude and longitude of the respective countries being more favorable to certain crops than others. Therefore, the use of comparative advantage MAY result in more efficient production (fewer necessary labor units), it does not necessarily have a direct cause-effect relationship. c. The Ricardian theory of comparative advantage states that a country has a comparative advantage in widgets if output per worker of widgets is higher in that country.

True: The Ricardian model states that increased productivity determines a country’s comparable advantage and thus encourages the countries specialize and trade to maximize the output and efficiency. d. Given the following information, neither country has a comparative advantage. Unit Labor Requirements Cloth Widgets Home 10 30 Foreign 3 9

FALSE: Although the Home (Domestic) country has an absolute advantage in production of cloth AND widgets, a comparative advantage always exists as it takes account of the production efficiency in two countries and is a relative term. In the case of these countries, the domestic country has a comparative advantage in the enormous disparity between its productivity with widgets compared to the productivity of the foreign country in making widgets. Therefore, the foreign country has its comparative advantage in the area of clothes.

e. In the 2-factor, 2 good Heckscher-Ohlin model, a change from autarky (no trade) to trade will equalize the wages in both countries. False: The Heckscher-Oblin model does not proffer equality for countries that engage in stringent adherence to its recommended shared production via product/labor between two countries. However, by following the recommended labor/capital levels both countries will be at their maximum efficiency in producing the two products evaluated. f.

In international-trade equilibrium in the Heckscher-Ohlin model, the capital rich country will charge less for the capital intensive good than the price paid by the capital poor country for the capital-intensive good. True: Heckscher-Ohlin model is based on the theory that if one country is abundant in labor, it will export a labor-intensive product to another country. If one country is capital-abundant, it will export capital-intensive products to the other country. 2. Many countries in Sub-Saharan Africa have very low labor productivities in many sectors, in manufacturing and agriculture.

They often despair of even trying to attempt to build their industries unless it is done in an autarkic context, behind protectionist walls because they do not believe they can compete with more productive industries abroad. Discuss this issue in the context of the Ricardian model of comparative advantage. (10 points) Undoubtedly, establishing dominance in a certain market within the worldwide economic sector is a difficult process. In the case of the sub-Saharan countries of Africa, it would benefit each tremendously to determine a niche in the marketplace – an area of production in which it has a comparative advantage in productivity.

This advantage can be assessed using neighboring countries willing to trade or by moving on to a more distant global market. 3. In 1975, wage levels in South Korea were roughly 5% of those in the United States. It is obvious that if the United States had allowed Korean goods to be freely imported into the United States at that time, this would have caused devastation to the standard of living in the United States, because no producer in this country could possibly compete with such low wages. Discuss this assertion in the context of the Ricardian model of comparative advantage.

(10 points) The wages being so much lower in South Korea would tempt the United States to send its labor needs over there, thus significantly lowering the cost of production. As a result of the cost of production being lower, the profit gained when sold at the higher prices possible in the United States would increase the profit margin. In the Ricardian model of comparative advantage, the labor would be done in South Korea and the enormous production yielded at the low cost would then be sold at regular price over in the United States.

The high amount of capital in the United States would be given to South Korea in exchange for the cheap labor. 4. At the conclusion of World War I, Germany, as a punishment, was obliged to make a large transfer to France in the form of reparations. Is it possible that the actual reparations may have improved Germany’s economic welfare? Discuss. (10 points) The condition of Germany being divided was inhibiting the potential re-growth of Europe according to the State Department planners.

When negotiations were met with obdurate refusal of the Soviets, the idea of a third force was presented. The issue of military security posed problems for the ‘third force’ idea, and even further, the problem of who would lead the third force alternative was not easily decided upon. By summer of 1948, they had agreed in what became known as the “London Conference” program, to allow Germans responsibilities of minimum control and limited control over the governmental affairs.

The internal State Department policy decreed West Germany was a political entity capable of aiding the reconstruction of Europe. When Germany began making reparations to France, it was already in a financial crisis of its own. However, by improving the relationship between Germany and France, the availability of trade created a more stable economic condition in Germany. By healing the economic damage in France, Germany was also improving the stability of a country with which it could exchange goods as per the guidelines of comparative advantage.

In other words Germany and France could begin a slow progress toward recovery by producing products at greater efficiency, which was crucial at a time when both countries were left fragile and destitute. 5. Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Analyze the impact on Japan’s terms of trade f the following events: (10 points) a. A war in the Middle East disrupts oil supply. A war breaking out in the Middle East would cut the oil supply all over the world. Due to Japan’s dependence on raw material imports, the production in Japan would fall.

Gas prices would rise and other oil-dependent factions of production would drop. Furthermore, any of the oil-dependent products Japan manufactured for export would be in decline, having a profound effect on the overall economy of the island nation. b. U. S. engineers develop a fusion reactor that replaces fossil fuel electricity plants. The United States making technological advances ahead of Japan would cause a shift in the demand of products relating to fusion reactors in Japan. Other countries would buy the new and improved form of technology from the United States.

At the same time, Japan would benefit from the new technology; by adopting a new fusion reaction would create greater energy efficiency in Japan, perhaps decreasing their dependency on foreign entities for energy production. As a country that depends on raw material imports, any decrease in the dependency by creating domestic means would aid Japan tremendously. c. A harvest failure in Russia. A harvest failure in Russia could result in less imports for Japan, subsequently leading less production of goods generated for export from Japan, created from the raw materials gained from Russia.