ECO610 Week 2 Assignment

Name

ECO 610 Global Economics

Prof

17th October 2022

Chapter 6: Let’s say that Norway and Sweden trade with each other. Norway sends Sweden fish, and Sweden sends Norway Volvo cars. Use the standard trade model to show the benefits of trade between the two countries, assuming that the tastes for the goods are the same in both countries but that the production possibility frontiers are different: Norway has a long coast that goes all the way to the North Atlantic, which makes it a better place to fish. Sweden has more capital, which makes it relatively more productive at making cars.

7th Chapter

1. For each of the following examples, explain whether it’s a case of external or internal economies of scale:

a.                   There are a lot of companies in southeastern South Carolina that do contract research for the drug industry. This is an example of external economies of scale because the companies doing research for the drug industry are concentrating their research and production in one area to save

money.

b.                  Every Honda made in the U.S. comes from a factory in Ohio, Indiana, or Alabama. This would be an example of internal economies of scale since the cost per car depends on the size of each plant and not necessarily on the industry. Honda is a pretty big company. Cars are made in big factories in Ohio, Indiana, and Alabama with the help of computers and pre­programmed steps. This brings down the price of each vehicle and lets each plant make more of them.

c.                   Airbus, the only company in Europe that makes large planes, puts together all of its airframes in Toulouse, France. This is an example of internal economies of scale because airframe costs don’t depend on the industry. After all, it’s the only place in Europe that makes big planes.

d.                  Cranbury, New Jersey, is the artificial flavor capital of the United States. This is an example of external economies of scale because the artificial flavor industry is mainly in Cranbury, NJ allows the sector to save money on different types of services needed for labor and day­to­day operations.

3. Give two examples of products traded on international markets with dynamically increasing returns. In each of your examples, you should show how innovation and learning by doing are essential to the industry’s dynamic trend of increasing returns. When the average cost per unit decreases as more units are made, this is called growing emotional returns [Kru17]. Companies that have been around for a while will do better than newer ones because of how they learn. Biotechnology is an example of a product with returns that grow over time. Biotechnology is a technology that is based on biology. It uses cellular and biomolecular processes to make new technologies and products [BIO18]. Innovation in this field encourages the creation of new products, but it also takes practice or learning by doing to turn these ideas into successful new products. Another example is aircraft design, which needs fresh ideas to make new planes that are safer and use less fuel.

6. It is common for an industrial cluster to break up and for production to move to places with lower wages when the industry’s technology stops changing quickly. This means that it is no longer necessary to have the most modern equipment. The need for highly skilled workers has gone down, and being on the cutting edge of innovation offers only a slight advantage. Using the theory of external economies, explain why industrial clusters tend to break up.

External economies are more efficient when they can support specialized suppliers, allow the pooling of labor markets, and help spread knowledge [Kru17]. If any of these three things get worse in a particular area, the benefits of geographic clustering will also get worse.

Part 8

5. In the chapter, we discussed a dumping case between two countries with similar economies.

Briefly explain how things would be different if the sizes of the two countries were different.

a.  How would the number of companies competing in a market affect the chance that an exporter to that market would be accused of dumping? Please assume that the likelihood of a dumping accusation is related to the price difference between the firm’s domestic and export prices: the more significant the price difference, the more likely the dumping indictment is. When imports are sold for less than their fair market value, like less than what they cost in the country where they were made, this is called “dumping”[Kru17]. As a market grows, so will the number of businesses that compete in it. At the same time, the price of a product in that market will decrease as the number of businesses that sell it increases. So, exporters' and domestic companies' prices go down when more companies are needed. This makes it more likely that dumping will be accused.

Chapter Nine

8.Consider each of the following statements in light of what you know about trade policy: “Tariffs on imported goods are a great way to cut down on unemployment.” This statement is false because the rates of tariffs have no direct effect on a country’s unemployment rate. Unemployment is very much affected by the state of a country’s labor market and its trade cycles. Tariff rates can, however, change the terms of employment. Suppose a country’s import tariffs were the same as those in other countries. In that case, the unemployment rate in the competing import sector could be lower than the competing export sectors.

b. “Taxes hurt the welfare of people in big countries more than in small countries.” This statement would also be wrong because tariffs in small countries reduce welfare, help producers but hurt consumers, and do not affect the price of goods worldwide. Because of these things, taxes have a terrible effect on small countries. When a tiny country puts a tariff on goods it imports, the price of those goods in other countries does not go down. The number of imported goods made goes up from S1 to S2, but the number of imported goods bought goes down from D1 to D2. So, because of the tariff, imports into the country that put the tax in place go down [Kru17].

c.  “Jobs making cars are moving to Mexico because wages are much lower than in the United

States. Because of this, we should put tariffs on cars equal to the difference in wages between the

U.S. and Mexico. Putting tariffs on vehicles identical to the difference in wage rates between the

U.S. and Mexico could cut down on car production in Mexico while increasing production in the U.S. Still, it would also make cars more expensive in the U.S. It could also lead to a decrease in welfare because of the loss in consumer surplus and the loss caused by the consumption and protection effects.

Chapter 10

6: “It doesn’t make sense for the United States to complain about how Japan and Europe handle trade. Every country has the right to do what it thinks is best for itself. Instead of complaining about other countries' trade policies, the U.S. should let them go their way, give up our own biases about free trade, and do the same. Talk about both the economics and the politics of this point of view.

This point of view is wrong because coordinating trade policies would improve national welfare. It would also make it easier for other governments to resist pressure from other special interest groups. Last but not least, coordinated trade policies would help stop trade wars.