ECON1086 International Trade

Task:

Required tasks
Your tasks involve two dimensions. First, you need to analyse the data (see Steps 1, 2 and 3 in the next section). Second, you also need to perform a technical analysis by considering a hypothetical trading environment based on Ricardian model (see Step 4 in the next section).
Accordingly, you are required to:
 
1. Establish whether being integrated with the rest of the world helped these two countries by looking at the correlation between their openness and GDP per capita.

2. Establish how being integrated with the rest of the world affected inequality in these two countries by looking at the correlation between their openness and GINI index.

3. State and explain whether your data findings are in line with theory (Assume both Armenia and Costa Rica are unskilled-labour abundant countries).

4. Continue your technical analysis from your first report and state what would have happened to these countries once they are allowed to trade with each other based on our hypothetical scenario of Ricardian model.

For technical analysis, you need to follow Step 4. This is the continuation of technical question from Assignment 1. In the previous assignment, you analysed the closed economy when there is no trade between them. Now, you will be asked to analyse what happens when these nations trade with each other, i.e., open economy.

5. In order to conjecture the circumstances in these two countries under free trade, consider the following hypothetical scenario based on Ricardian model. Assume throughout that those two countries (Armenia and Costa Rica) are the only two countries in the world, at least for purposes of trade. There are two goods: computers and headphones. Consumers in both countries always spend half of their income on computers and half of their income on headphones. The only factor of production is labour. Each Armenian worker can produce 2 computers or 3 headphones per unit of time. Each Costa Rican worker can produce 1 computer or 4 headphones per unit of time. There are 50 workers in Armenia and 50 workers in Costa Rica.

a) Derive the relative demand curve relating the relative demand for headphones to the relative price of headphones. Do this algebraically, and
then show what the curve looks like in a diagram (put the relative price of headphones on the vertical axis and the relative quantity of headphones demanded on the horizontal axis).

b) Derive the world relative supply curve of headphones (put the relative price of headphones on the vertical axis and the relative quantity of headphones supplied on the horizontal axis).

c) Put in the same figure the relative demand curve for headphones that you found in part (a) and the world relative supply curve of headphones that you found in part (b). Determine the equilibrium relative price of headphones and the equilibrium relative quantity of headphones under free trade.

d) Under free trade, which country produces which good(s)? How many units?

e) Who gains from trade? Who loses from trade? State workers’ stance towards free trade in each country, i.e., do they support or oppose free
trade?  

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