Name: Trần Thị Trung Yến INTERNATIONALUNIVERSITY

ID: BABAWE15273 SCHOOL OF BUSINESS

INTERNATIONAL ECONOMICS
ASSIGNMENT
 CHAPTER 2
PROBLEM 6:
a) Complete the prev0ious table in the same manner as Table 2-2 in the chapter

Home Foreign Absolute Advantage

Number of bicycles
4 2 Home/Foreign ratio 2
produced per hour
Number of snowboards
6 8 Home/Foreign ratio 3/4
produced per hour
Comparative advantage MPLS/MPLB = 3/2 MPL*S/MPL*B = 4

b) Which country has an absolute advantage in the production of bicycles? Which country
has an absolute advantage in the production of snowboards?
- Home has an absolute advantage in the production of bicycles because it can produce
bicycles with fewer resources (more per hour) than Foreign.
- Foreign has an absolute advantage in the production of snowboards because it can
produce snowboards with fewer resources (more per hour) than Home.
c) What is the opportunity cost of bicycles in terms of snowboards at Home? Whatis the
opportunity cost of bi cycles in terms of snowboards in Foreign?
The opportunity cost of one bicycle is 3/2 snowboards at Home. The opportunity cost of
one bicycle is 8/2 snowboards in the foreign country.
d) Which product will Home export and which product will Foreign export? Briefly explain
why.
Foreign has a lower opportunity cost in producing snowboards thanHome. Therefore,
Foreign has a comparative advantage in the production of snowboards. Given Foreign’s
comparative advantage, Home has a comparative advantage in the production of bicycles.
Thus, Home will export bicycles and Foreign will export snowboards.
PROBLEM 7:
a) What is the marginal product of labor for televisions and cars in the Home country? What
is the no-trade relative price of televisions at Home?
MPLTV = 2
We have W = P*MPL  PTV = 12/2 = 6
No-trade relative price of TV = PTV/PC = MPLC/MPLTV = 6/4 = 3/2
  MPLC = 3
b) What is the marginal product of labor for televisions and cars in Foreign country? What is
the no-trade relative price of televisions in Foreign?
MPL*C = 1
We have W = P*MPL  P*C = 6/1 = 6
No-trade relative price of TV = P*TV/P*C = MPL*C/MPL*TV = 3/6 = 1/2
 MPL*TV = 2
c) Suppose the world relative price of TV in the trade equilibrium isy PTV/ PC = 1. Which good
will each country export? Briefly explain why.
We have: P*TV/P*C = 0.5 < PeTV/ PeC = 1 < PTV/ PC = 1.5
Hence, Home will export cars and Foreign will export televisions because Home has a
comparative advantage in cars whereas Foreign has a comparative advantage in televisions.
d) In the trade equilibrium, what is the real wage at Home in terms of cars and in terms of
televisions? How do these values compare with the real wage in terms of either good in
the no-trade equilibrium?
MPLC = 3 units of car
Home wages with trade = or
(PC/PTV) *MPLC = 3 units of TV
MPLC = 3 units of car
Home wages without trade = or
(PC/PTV) *MPLC = (2/3) *3 = 2 units of TV
e) In the trade equilibrium, what is the real wage at Foreign in terms of cars and interms of
televisions? How do these values compare with the real wage in terms of either good in
the no-trade equilibrium?
(P*TV/P*C) *MPLTV = 2 units of car
Foreign wages with trade = or
*
MPL TV = 2 units of TV
(P*TV/P*C) *MPLTV = (1/2) *2 = 1 units of car
Foreign wages without trade = or
*
MPL TV = 2 units of TV
f) In the trade equilibrium, do Foreign workers earn more or less than those at Home,
measured in terms of their ability to purchase goods? Explain why.
Foreign workers earn less than workers at Home in terms of cars because Home has an
absolute advantage in the production of cars. Home workers also earn more than Foreign
workers in terms of televisions.
PROBLEM 8:
To engage in international trade, a country must have a minimal threshold of productivity.
Countries such as China have the productivity necessary to compete successfully, but Haiti does
not.
 CHAPTER 4
PROBLEM 3:
a) Which industry is capital-intensive? Is this a reasonable question, given that some
industries are capital-intensive in some countries and labor -intensive in others?
WLC /RKC > WLS/RKS (and thus LC/KC > LS/KS) implies that shoes are capital intensive. This is
certainly possible as shown in the New Balance application
b) Given the percentage changes in output prices in the data provided, calculate the
percentage change in the rental on capital. How does the magnitude of this change
compare with that of labour?
For computers:
R/R = {(PC/PC) *PCQC – (W/W) *WLC}/RKC
= {(0%) *100 – (W/W) *5}/95
= – (W/W)
For shoes:
R/R = {(PS/PS) *PSQS – (W/W) *WLS}/RKS
= {(50%) *100 – (W/W) *5}/95
= 50/95 – (W/W) *(50/95)
Substituting the computer equation into the shoes equation:
R/R = 50/95 + (R/R) *(5/95)  R/R *(1 – 5/95) =50/95
R/R = 50/90 = 0.556 or 55.6%
This implies: W/W = – R/R = – 55.6%
As seen in the percentage change calculation for the rental of capital in the shoes industry,
the magnitude of the changes is equal (with opposite sign).
c) Which factor gains in real terms, and which factor loses? Are these results consistent with
the Stolper-Samuelson theorem? Explain.
Because the increase in capital returns exceeds the price changes in both industries, capital
gains in real terms. Similarly, because there is a decrease in wage and the prices of the
outputs stayed the same or increased, labour loses in real terms. This is consistent with the
Stolper-Samuelson theorem: In the long run, when all factors are mobile, an increase in the
relative price of a good will cause the real earnings of labour and capital to move in
opposite directions, with a rise in the real earnings of the factor used intensively in the
industry whose relative price went up and a decrease in the real earnings of the other
factor.
PROBLEM 5:
With free trade the labor-abundant Foreign country will increase productionof the labor-
intensive good (shoes), leading to a rightward shift of the relative demand curve from RD*1 to
RD*2. At the new equilibrium point B*, computers are weightedless, a fall in (K*C/K*), whereas
the shoe industry is weighted more, a rise in (K*S/ K*). As a result of the rise in the relative

* *
demand for labor in the shoe industry, the relative wage increases and lowers the labor/capital
ratio in both industries.

Wage/
Rental

(W*/R*)2 B*

(W*/R*)1 A*
RD*2 L*S/K*S
RD*1
L*C/K*C
Labor/Capital
(L*C/K*C)2 (L*C/K*C)1 (L*S/K*S)2 (L*S/K*S)1
PROBLEM 6:
a) According to the Heckscher-Ohlin theorem, is Russia capital-abundant or labor-abundant?
Briefly explain.
Russia is labor abundant because it imports the capital-intensive good.
b) What is the impact of opening trade on the real wage in Russia?
Russia will specialize in the labor-intensive product, which will lead to an increase the
relative demand for labor in the labor-intensive industry. This causes an increase in the
relative wage. The higher relative wage cuts the num-ber of workers hired per unit of
capital in the labor-intensive industry, thereby reducing the labor/capital ratio. By the law of
diminishing returns, the decrease in the labor/capital ratio leads to a rise in the marginal
produce of labor in both industries. Thus, the real wage will increase in Russia following
trade.
c) What is the impact of opening trade on the real rental on capital?
The real rental on capital will decrease because the world relative price of automobiles is
lower than Russia’s no-trade relative price. More specifically, with a lower labor/capital
ratio in both industries, the marginal product of capital decreases so that the real rental on
capital falls.
d) Which group (capital owner or labor) would support policies to limit free trade? Briefly
explain.
The capital owners will support policies to limit free trade because theysuffer a loss due to
the decrease in the relative price of automobiles when Russiaengages in trade.
 CHAPTER 7
PROBLEM 10:
Tire manufactures operating in the United States did not support the tariff because many of
them already manufacture tires in China. Of the ten manufactures operating in the United
States, seven also produce tires in China, so a tariff on tires imported from China would make it
costlier for them to produce in China.
PROBLEM 11:
a) Calculate Home consumer surplus and producer surplus in the absence of trade.
Consumer surplus without tariff: CS = 0.5 *5 *(14 - 9) = 12.5
Producer surplus without tariff: PS = 0.5 *5 *(9 - 4) = 12.5
Total surplus: TS = CS + PS = 12.5 + 12.5 = 25
b) Now suppose that Home engages in trade and faces the world price, P*= $6. Determine
the consumer and producer surplus under free trade. Does Home benefit from trade?
Explain.
Consumer surplus under free trade: CS = 0.5 *8 *(14 - 6) = 32
Producer surplus under free trade: PS = 0.5 *2 *(6 - 4) = 2
Total surplus: TS = CS + PS = 32 + 2 = 34
 Home is better off with trade because total surplus increases by 9.
c) Concerned about the welfare of the local producers, the Home government imposes a
tariff in the amount of $2 (i.e., t = $2). Determine the net effect of the tariff on the Home
economy.
Consumer surplus with tariff: CS = 0.5 *6 *(14 - 8) = 18
Producer surplus with tariff: PS = 0.5 *4 *(8 – 4) = 8
Government with tariff: G = (6 - 4) *(8 - 6) = 4
Fall in consumer surplus: - 14
Rise in producer surplus: +6
Rise in government revenue: +4
Net effect on Home welfare: -4
 CHAPTER 10
PROBLEM 3:
a) Canada (dollar), 1980-2012: Floating exchange rate
b) China (yuan):
1999-2004: Fixed exchange rate
2005-2009: Gradual appreciation vis-à-vis the dollar
2009-2010: Fixed exchange rate
c) Mexico (peso):
1993-1995: Crawl
1995-2012: Floating (with some evidence of a managed float)
d) Thailand (baht):
1986-1997: Fixed exchange rate
1997-2012: Floating
e) Venezuela (bolivar), 2003-2012: Fixed exchange rate (with occasional adjustments)
PROBLEM 7:
a) Assuming that the exchange rate remains unchanged, how much does your firm expect to
receive in U.S. dollars?
The firm expects to receive $400,000 = (¥40,000,000/100)
b) How much would your firm receive (in U.S. dollars) if the dollar appreciated to110 yen per
U.S. dollar (E$/¥ 0.00909)?
The firm would receive $363,636 = (¥40,000,000/110)
c) Describe how you could use an options contract to hedge against the risk of losses
associated with the potential appreciation in the U.S. dollar
The firm could buy ¥40 million in call options on dollars at a rate of 105 ¥ per dollar.This
would ensure the firm's yen receipts will sell for at least this rate (between the current 100
and future 110 rate).
 CHAPTER 11
PROBLEM 1:
a) If the law of one price holds, what is the price of coffee in Côte d’Ivoire, measured in CFA
francs?
According to Law of One Price, price of coffee should be the same in both countries: P C =
PV/EVND/XOF =5,000/30 = 166.7
b) Assume the price of coffee in Côte d’Ivoire is actually 160 CFA francs per pound of coffee.
Compute the relative price of coffee in Côte d’Ivoire versus Vietnam. Where will coffee
traders buy coffee? Where will they sell coffee in this case? How will these transactions
affect the price of coffee in Vietnam? In Côte d’Ivoire?
QC/V = (EVND/XOF*PC)/PV = (30*160)/5000 = 0.96 <1
Traders will buy coffee in Côte d’Ivoire because it’s cheaper there and will sell it in Vietnam.
This will lead to an increase in the price of coffee in Côte d’Ivoire and a decrease in price of
coffee in Vietnam.
PROBLEM 5:
a) What is the expected U.S minus U.K inflation differential for the coming year?
The inflation differential = 2% - 3% = - 1%
b) What is the current U.S real exchange rate qUS/UK with the United Kingdom?
QUS/UK = (E$/£*PUK)/PUS = $120/$100 = 1.2
c) How much is the dollar overvalued/ undervalued?
The British pound is undervalued by 20% and the U.S dollar is overvalued by 20% (=1.2 –
1/1)
d) What do you predict the U.S real exchange rate with the United Kingdom wil be in one
year’s time?
We can use the information on convergence to compute the implied change in the U.S real
exchange rate. We know the speed of convergence to absolute PPP is 15%; that is, each
year the real exchange rate will adjust by 15% of what is needed to achieve the real
 exchange rate equal to 1 (assuming prices in each country remain unchanged). Today, the
real exchange rate is equal to 1.2, implying a 0.2 decrease in needed to satisfy absolute PPP.
Over the next year, 15% of this adjustment will occur, so the real exchange rate will
decrease by 0.03. Therefore, after one year, the U.S real exchange rate will be 1.17.
e) What is the expected rate of real depreciation for the United States (versus the United
Kingdom)?
From d), the real exchange rate will decrease by 0.03. Therefore, the rate of real
depreciation is equal to – 0.03/1.2 = - 2.5%
This implies the real appreciation in the United States relative to the United Kingdom.
f) What is the expected rate of nominal depreciation for the United States (versus the United
Kingdom)?
The inflation differential is -1% and the expected real depreciation is -2.5%
Nominal depreciation = -1% + (-2.5%) = -3.5%
That is, we expect a 3.5% appreciation in the U.S dollar relative to the British pound.
g) What do you predict will be the dollar price of one pound a year from now?
The current nominal exchange rate is $2 per pound and we expect a 3.5% appreciation in
the U.S dollar. Therefore, the expected exchange rate in one year is equal $2*(1 – 0.035) =
$1.93.
PROBLEM 8:
a) Compute the interest rate paid on Korean deposits.
According to Fisher effect, (iwon - i¥) = (πK – πJ)
 iwon = (6% - 1%) + 3% = 8%
b) Using the definition of the real interest rate (nominal interest rate adjusted for inflation),
show that the real interest rate in Korea is equal to the real interest rate in Japan.
r¥ = i¥ - πJ = 2% - 1% = 1%
rwon = iwon - πK = 8% - 6% = 2%
c) Suppose the Bank of Korea increases the money growth rate from 12% to 15% and the
inflation rate rises proportionately (one for one) with this increase. If the nominal interest
rate I Japan remains unchanged, what happen to the interest rate paid on Korean
deposits?
iwon = rwon + πK = 1% + 9% = 10%
d) Using time series diagram, illustrate how this increase in the money growth rate affects
the money supply MK; Korea’s interest rate; price PK; real money supply; and Ewon/¥ over
time.

MK

2

1
Time
PK iwon
 CHAPTER 13
PROBLEM 3:
a) A California computer manufacturer purchases a $50 hard disk from a Malaysian
company, paying the funds from a bank account in Malaysia.
Description BOP account Account (detail) Credit/Debit
Hard disk imported from Malaysia CA () −IM (), TB () −$50
Decrease in Malaysian deposits
FA () −IMFA () +$50
owed by U.S firm

b) A U.S tourist to Japan sells his iPod to a local resident for yen worth $100.
Description BOP account Account (detail) Credit/Debit
iPod exported to Japan CA () +EX (), TB () +$100
Increase in Japanese currency
FA () −IMFA () −$100
owed by U.S tourist

c) The U.S Central Bank sells $500 million of its holdings of U.S Treasury bonds to a British
financial firm and purchases pound sterling foreign reserves.
Description BOP account Account (detail) Credit/Debit
U.S. bonds sold to British firm FA () H
+EX A () +$500 mil
Pound-sterling reserves imported
FA () −IMFA () −$500 mil
from Britain

d) A foreign owner of Apple shares receives $10,000 in dividend payments, which are paid
into a New York bank.
Description BOP account Account (detail) Credit/Debit
Import of factor service
CA () −IMFS (), NFIA () −$10,000
(ownership) from ROW
New York bank deposits paid
FA () −IMFA () +$10,000
to ROW
e) The central bank of China purchases $1 million of export earnings from a firm that sold $1
million of toys to the United States, and the central bank holds these dollars as reserves.
Description BOP account Account (detail) Credit/Debit
Import of toys from China CA () −IM (), TB () −$1 mil
China central bank buys U.S.
FA () −EXHA () +$1 mil
dollars

f) The U.S government forgives a $50 million debt owed by a developing country.
Description BOP account Account (detail) Credit/Debit
Debt forgiveness (gift) KA () −KAOUT () −$50 mil
Decrease in external assets
FA () −IMFA () +$50 mil
owned by U.S. entities

PROBLEM 4:
a) What happened to Ikonomia’s net foreign assets during 2010? Did it acquire or lose
foreign assets during the year?
BOP = CA + FA + KA = 0
CA + KA = − FA
Current account deficit of $1 billion ($1,000 million) and the capital account is in a $100
million surplus.
−$1,000 + $100 = −FA
FA = $900 = EXA − IMA
The financial account records financial flows in to and out of the country. In this case, the FA
surplus indicates that on net, foreigners purchased more Ikonomian assets than Ikonomians
purchased foreign assets. Therefore, net foreign assets for Ikonomia declined by $900
million.
b) Compute the official settlements balance (OSB). Based on this number, what happened to
the central bank’s (foreign) reserves?
The financial account can be split into those transactions conducted by the central bank
(official settlements balance) and those conducted by everyone else (nonreserve financial
account):
FA = Official settlements balance + Nonreserve financial account
Nonreserve financial account is a $750 million surplus.
$900 = Official settlements balance + $750
Official settlements balance = $150
The official settlements balance is in a $150 million surplus. This means that foreign central
banks purchased more Ikonomian assets (paid for with foreign currency) than the
Ikonomian central bank purchases of foreign assets (paid for with domestic currency, U.S.
dollars in this case). Therefore, Ikonomia’s central bank experienced an increase in its
foreign reserve holdings.
c) How much income did foreign factors of production ear in Ikonomia during 2010?
The current account can be split into three components: the trade balance (final goods and
services), the net factor income from abroad (payments to/from factor services), and the
net unilateral transfers.
CA = TB + NFIA + NUT
−$1,000 = −$800 + NFIA + 0
In the question, we are given the trade balance (−$800 million) and the current account
(−$1,000 million).
NFIA = −$200
Net factor income from abroad is $200 million.
This implies that foreign factors of production located in Ikonomia earned more than
Ikonomian factors abroad.
NFIA = EXFS – IMFS
We know that Ikonomian factors abroad earned $700 million.
−$200 = $700 − IMFS
IMFS = $900
Foreign factors located in Ikonomia earned $900 million.
d) Compute net factor income from abroad (NFIA)
NFIA = −$200 million
e) Using the identity BOP = CA + FA + KA, show that BOP = 0
BOP = CA + FA + KA
BOP = (TB + NFIA + NUT) + FA + KA
BOP = ($800 − $200 + $0) + ($750 + $150) + $100 = 0
f) Compute Ikonomia’s gross national expenditure (GNE), gross national income (GNI), and
gross national disposable income (GNDI)
GDP = C + I + G + (EX − IM) = GNE + TB
GNE = GDP – TB = $9,000 − (−$800) = $9,800
GNI = GDP + NFIA = $9,000 + (−$200) = $8,800
GNDI = GDP + NFIA + NUT = GNI + NUT.
Because NUT = $0, GNDI = GNI = $8,800