ECON 115

Spring 2014
PS1
DUE IN LECTURE 02/11/2014

GENERAL INSTRUCTIONS
Please include your name and your GSI name on the first page.
Please make sure to type your answers

Problem I. Trade and inequality

Download the file with the data for current problem set (Problem set 1 Data.csv) from
the course website. The file contains 3 sheets with data on Gini coefficient (taken from the
World Institute for Development Research database), share of exports and share of imports
in the GDP (taking from WorldBank World Development Indicators database) for selected
15 countries starting from 1960. Using data on country that was assigned to you, do the
following exercises (where necessary, write BRIEF answers):

1. In Excel or you preferred spreadsheet, plot two graphs: one with evolution of Gini
coefficient in time, another one with evolution of share of export, import and their sum in
GDP. Verbally describe the trends that you can see (if any). You can review the following
video on how to plot line graphs in Excel: bit.ly/1ihJpjC

2. Heckscher-Ohlin model predicts that trade might have an effect on inequality within
the country. Check whether there is a relationship between Gini coefficient and a measure
of trade openness:

2.1 Draw the graph with years on horizontal axis, Gini coefficient on left vertical axis and
the sum of import and export shares in GDP on right vertical axis. Do you see any common
trends? Check here how to add a secondary axis to the excel graph: http://bit.ly/LxPL37

2.2 Create a scatter chart with the sum of shares of import and export in GDP on the
horizontal axis and Gini coefficient on the vertical axis. Add the linear trend line. Do you see
a positive or negative relationship? Is it strong or weak? You can review the following video
on how to create scatter charts in Excel: bit.ly/1hZg10V

Depending on the country that was assigned to you, what would Heckscher-Ohlin theory
predict about the influence of globalization on inequality (assume there are only two
factors of production, labor and capital, decide, whether at the beginning of the period of
interest the country was labor or capital abundant)? Do we see that prediction is true in the
data?


3. Calculate and report average growth rates of import and export as a share of GDP
and Gini coefficient using the formula:

Where X is some variable of interest (import, export or Gini), k is the first year for which
observations for specific variable are available, t is the last year for which observations
for specific variable are available.

4. Conclude whether Heckscher-Ohlin theory is useful in explaining trends in inequality
for the country you were working with. Can you list one other factor that could have
influenced inequality in that country during the period of interest?

Please, print the table with year, Gini coefficient, export/import shares and their sum,
growth rates that you calculate in part 3 and attach it to your problem set. Dont forget to
mention the country you are writing about. Also print all of the graphs you created.




Problem II. Inequality and income per capita

1. Using website http://www.gapminder.org/world construct a graph with income per
person (GDP per capita / PPP$ inflation-adjusted) on a horizontal axis and a measure of
inequality on vertical axis (from the dropdown list select Economy -> Poverty and
Inequality -> Inequality Index (Gini)) for the year 2000. Briefly describe whether you see
a relationship between the two?

2. You can see that the graph is composed of bubbles of different colors, which
correspond to different geographic areas. By moving a mouse toward a small world map in
the upper-right corner of the panel you can highlight a certain geographic region. Using this
trick, elaborate on whether there is a relationship (if yes, then is it direct or inverse)
between income per capita and inequality in Africa, Europe and Central Asia, America

Problem III. Commodity market integration and inequality

1. Knick Harley (1980) collects data on wholesale and farm prices of wheat on various
markets in the USA (see Figure 1 and Table 1 in the pdf-file with Harley (1980) paper).
What can you say about trends in wheat market integration between the UK and the USA
during the first wave of globalization? Was it more pronounced between closer or distant
markets?
2. ORourke, Taylor and Williamson (1996) do a lot of work to construct the ratios of
unskilled labor wages to land values, which is a proxy for the w/r ratio in the Heckscher-
Ohlin model. What are the trends in this ratio in the New World and Old World (free
trade) see figures 1 and 2 at the end of the corresponding pdf-file? Are the trends in
wheat prices and unskilled wage to land value ratio consistent with predictions of HO
model? Why or why not? Assume that New World is land-abundant and Old World is
abundant with unskilled labor. Who gained and who lost in the first wave of globalization
in the New World and in the Old World?
3. Williamson (1997) constructs a measure of inequality by calculating the share of
unskilled labor to GDP per worker hour (the higher the ratio is, the lower inequality, do not
confuse with Gini coefficient, which is higher when inequality is higher). Using Figures 3
and 4 from the corresponding pdf-file with the paper, argue how globalization affected
level of inequality in land abundant countries (New World) and labor abundant countries
(Old World).