Seminar 2

International Business –

Class A

1a) How does the mercantilist concept of national wealth differ from today’s view?

Mercantilist Concept:

-Stock of precious metals in possession (ie. Gold and silver)

Today, national wealth is determined by:

-Stock of human, man-made and natural resources for production of goods and services

1b) Why did mercantilism advocate the accumulation of gold?

• Economic health of a nation measured by amount of precious metal, gold, or silver a country possessed --> trade surplus encouraged by maximizing exports (through subsidies) and minimizing imports (through tariffs and quotas)

Economic problems of earlier times when states were too weak to guide their economies and when every town or principality levied its own tariffs on goods passing through its borders.

Each government’s primary economic objective was to command a sufficient quantity of hard currency to support a military that would deter attacks by other countries and aid its own territorial expansion.

1c) How do the mercantilists’ views on trade differ from those of Adam Smith?

Mercantilism

• Developed in 16th century• Mercantilist thinking• Nation depends upon its supply of capital (Gold and Silver)• Encourage export, discourage import• Impose tariffs, banned export of raw materials• Poorer

Adam Smith

• Developed in 17th century • Anti-Mercantilist thinking• Nation depends on the ability of production

• Encourage free trade

• Richer

2a) How did Adam Smith explain his contention that all nations engaged in trade benefit from trade?

• The benefits from trade would come from specialization in production

• Country will produce what they are efficient in and exchange them for goods in which they have an absolute disadvantage.

• Efficiency – Resources will be efficiently utilized, total output and consumption/welfare will increase

• Benefit the consumers – Able to purchase same goods at a lower price

• .:. Trade as a voluntary exchange of goods leads to gains for the parties involved.

2b) Why do nations usually impose restrictions on the free flow of trade?

• - Trade Restrictions: Countries uses tariffs, quotas, subsidies and other non-tariff barriers to control the flow of goods across their borders.

• -Protect domestic industries by reducing foreign competition, the use of such controls is often called protectionism.

• - Tariffs are taxes on imports. Because they raise the price of the foreign-made goods, they make them less competitive.

• ---> ad-valorem, specific and compound.

• ---> tariffs anti-consumer and pro-producers.

• ---> reduce overall efficiency of world economy

• Restrictions on free flow of goods

---> good or worst off?

• Subsidies: government payment to domestic producers; cash grants, low interest loans etc

--->compete against foreign exports and gain export markets

---> more perverse effects than tariffs

eg: US govt agricultural subsidy program for farmers.

Quotas limit the quantity of a goods that can be imported or exported into a country.----> import quotas. eg: US quotas in

imports cheese, sugar, textile----> export quotas. eg: indonesia bans exports of log and rattan

B) Comparative Advantage: 1(a) If a lawyer earns $100 per hour at practising law but ca

n also type faster than her secretary who receives $10 per hour, does it pay for the lawyer to fire her secretary and do her own typing?

• Not worthwhile• For every 1 hour of typing, lawyer loses $90 of original in

come

(b) The reasoning you employed in answering (a) is an example of what principle?

• Opportunity cost

B) Comparative Advantage: 2. With respect to each part of the table below, indicate in e

ach case the good in which each country has a comparative advantage or disadvantage.

Production Possibilities in the US and the UK: Case

A(US)

Case A

(UK)

Case B

(US)

Case B

(UK)

Case C

(US)

Case C

(UK)

Wheat(bushels/labour-hour)

4 1 4 1 4 1

Cloth (yards/labour-hour)

1 2 3 2 2 2

B) Comparative Advantage: 2. Answer

US UK

ComparativeAdv

Comparative Disadv

Comparative Adv

Comparative Disadv

Case A

Wheat Cloth Cloth Wheat

Case B

Wheat Cloth Cloth Wheat

Case C

Wheat Cloth Cloth Wheat

B) Comparative Advantage: 3. With respect to the table above, indicate in each case

whether or not trade is possible and the basis for trade.

• Trade is possible for all cases

Case A

(US)

Case A

(UK)

Case B

(US)

Case B

(UK)

Case C

(US)

Case C

(UK)

Wheat(bushels/labour-hour)

4 1 4 1 4 1

Cloth (yards/labour-hour)

1 2 3 2 2 2

Relative Pricing 4 0.5 1.3 0.5 2 0.5

B) Comparative Advantage: 3.

Case A

(US)

Case A

(UK)

Case B (US)

Case B (UK)

Case C (US)

Case C (UK)

Wheat(bushels/labour-hour)

4 1 4 1 4 1

Cloth (yards/labour-hour) 1 2 3 2 2 2

Relative Pricing 4 0.5 1.3 0.5 2 0.5

Basis for trade 1C ≤ 4W≤ 8C1W≤ 2C≤ 8W

3C≤ 4W≤ 8C1W≤ 2C≤ 2⅔W

2C≤4W≤8C1W≤2C≤4W

Production Possibilities in the US & UK

Case A(US)

Case A

(UK)

Case B(US)

Case B

(UK)

Case C(US)

Case C

(UK)

WHEAT

(bushels/

labour-hour)

4 1 4 1 4 1

CLOTH

(yards/

labour-hour)

1 2 3 2 2 2

Q4Suppose that in case B above

the US exchanges 4W for 4C with the UK.

• Rate of exchange: 4W = 4C

Q4 (a) How much does the US gain?

Case B(US)

Case B

(UK)WHEAT

(bushels/

labour-hour)

4 1

CLOTH

(yards/

labour-hour)

3 2

Case B(US)

Case B

(UK)WHEAT

(bushels/

labour-hour)

4 2

CLOTH

(yards/

labour-hour)

3 4

US gets 3C(per hour of labour/4W) before trade, and 4C after trade.

Therefore, the US gains 1C.

Q4 (b) How much does the UK gain? Case B

(US)

Case B

(UK)WHEAT

(bushels/

labour-hour)

4 1

CLOTH

(yards/

labour-hour)

3 2

Case B(US)

Case B

(UK)WHEAT

(bushels/

labour-hour)

4 2

CLOTH

(yards/

labour-hour)

3 4

UK gets 2W(per hour of labour/4C) before trade, 4W after trade.

Therefore, the UK gains 2W.

Q4 (c) How much would each nation gain if they

exchanged 4W for 6C instead?

Case B(US)

Case B

(UK)WHEAT

(bushels/

labour-hour)

4 1

CLOTH

(yards/

labour-hour)

3 2

US UK

4W 6C

Before trade, for 4W (1 hour of labour), US would get 3C.

After trade, US gets 6C for 4W. US gains 3C.

Before trade, for 6C (3 hours of labour), UK would

get 3W. After trade, UK gets 6C for

4W. UK gains 1W.

Q5Use the

information for Case B above

and assume that labour is

-the only factor of production

-and is homogeneous.

Case B(US)

Case B

(UK)WHEAT

(bushels/

labour-hour)

4 1

CLOTH

(yards/

labour-hour)

3 2

Q5 (a) What is the cost in terms of labour content of

producing wheat and cloth in the US and the UK?

Cost in terms of labour content

US UK

WHEAT (units)4W=1h

1W = ¼ h1W = 1h

CLOTH (units)3C = 1h

1C = 1/3h

2C = 1h

1C = ½ h

Q5 (b) What is the dollar price of wheat and cloth in the US if the wage rate is $6?

PRICE = WAGE/QUANTITY

Pwheat (US) = 6 / 4= $1.5

Pcloth (US) = 6 / 3

= $2

US($)

WHEAT

/bushel1.5

CLOTH

/yard2

Q5 (c) What is the pound price of wheat and cloth in the UK if the wage rate is £1?

PRICE = WAGE/QUANTITY

Pwheat (UK) = 1 / 1= £1

Pcloth (UK) = 1 / 2= £0.5

UK(£)

WHEAT /bushel

1

CLOTH

/yard0.5

Question 6• Answer the following question with reference to problem 5.

• (a) What is the dollar price of wheat and cloth in the UK if the exchange rate between the pound and the dollar is £1 = $2 ? Would the US be able to export wheat to the UK at this exchange rate? Would the UK be able to export cloth to the US at this exchange rate?

• (b) What if the exchange rate were £1 = $4?

• (c) What if the exchange rate were £1 = $1?

• (d) What is the range of exchange rates that will allow the US to export wheat to the UK and the UK to export cloth to the US?

With reference to Qn 5

Case B US (Qty) UK (Qty)

Wheat (bushels/labour-hour)

4 1

Cloth (yards/labour-hour)

3 2

Wage rate (US) = $6 / hrWage rate (UK) = £1 / hr

Dollar Price = Wage / Qty

US ($) UK (£)

Wheat 1.5 1

Cloth 2 0.5

Dollar Price of Wheat and Cloth in UK (£1 = $2)

• US will be able to export wheat to UK. – Relatively cheaper to produce in US than UK

• UK will be able to export cloth to US– Relatively cheaper to produce in UK than US

Dollar Price US ($) UK(£)

Wheat 1.5 2

Cloth 2 1

Dollar Price of Wheat and Cloth in UK (£1 = $4)

Dollar Price US ($) UK()

Wheat 1.5 4

Cloth 2 2

• US will be able to export wheat to UK. – Relatively cheaper to produce in US than UK

• UK will be indifferent to export cloth to US– Price in producing cloth is the same in both US

and UK

Dollar Price of Wheat and Cloth in UK (£1 = $1)

Dollar Price US ($) UK(£)

Wheat 1.5 1

Cloth 2 0.5

• US will not be able to export wheat to UK. – Relatively more expensive to produce in US th

an UK

• UK will be able to export cloth to US– Relatively cheaper to produce in UK than US

Range of Exchange Rates• For US to export wheat to UK

–Exchange rate should be between $1 < $2

• For UK to export cloth to US–Exchange rate should be between $2 < $4

Question 7

• Unions in developed countries often oppose imports from low-wage countries and advocate trade barriers to protect jobs from what they often characterize as “unfair” import competition. Is such competition “unfair”?

No

Export

Import

Illustration Michigan import: oranges from Florida

apples from Washingtonwheat from Kansascotton from Georgia

Resulted in: job lost in oranges, apples, wheat, cotton indust

ry

residents find it cheaper to import commodities

export automobiles and other goods that are more economically produced

use revenue buy imports that are expensive to produce.

Backlash:

Behind the Anxiety over Globalization

• 1. US does little to help those that loses out

• 2. Extra GDP gain from international trade was not used to compensate losers

Do you think that this argument is in the best interests of (a) the unions?

Trade union is an organization of workers that band together to achieve common goals in key are

as such as working conditions.

Yes!

Commentary:

Low-Skilled Jobs: Do They Have to Move?

(Business Week)

New Balance Stays a Step Ahead(U.S. News)

Invest in Advanced Technology

Training and Development

Revise Remuneration Scheme

Do you think that this argument is in the best interests of (b) the people they repre

sent?

Yes (short term), No (long term)

Job (low-skilled)

Job (high-skilled)

Export jobs often pay more than other jobs

Do you think that this argument is in the best interests of (c) the country as a wh

ole?

•Lesser competitions lead to economic growth to be stagnant

•Consumer will pay a higher price for goods and services

BW / Harris Poll: Globalization: What Americans Are Worried About?