EC 340 Survey of International Economics Past Paper PDF 2025

EC 340 Survey of International Economics January 16, 2025 (c) Steven J. Matusz, 2025 1  Econ Young Alumni Networking Event Date: Thursday, Jan 30 Time: 3:30 PM - 5:30 PM Location: MSU Union Learn more & RSVP by 1/22 Space is limited!: Remember that the b...

EC 340 Survey of International Economics January 16, 2025 (c) Steven J. Matusz, 2025 1  Econ Young Alumni Networking Event Date: Thursday, Jan 30 Time: 3:30 PM - 5:30 PM Location: MSU Union Learn more & RSVP by 1/22 Space is limited!: Remember that the book is recommended, not required. This information is for those who are following along with the textbook. Chapter 2: Trade and Autarky: Economic self- Technology: The sufficiency; no trade Ricardian Model with the rest of the (Continued) world January 16, 2025 (c) Steven J. Matusz, 2025 3  England’s PPF If England is in autarky, Quantity of Cloth 500 it must produce 450 Initial production and consumption whatever it wishes to 400 (100 wine & 150 cloth) consume 350 300 250 200 If England wishes to 150 consume more wine, it 100 can only do so by producing more wine 50 0 0 20 40 60 80 100 120 140 160 which comes at the Quantity of Wine expense of producing (and consuming) less cloth January 16, 2025 (c) Steven J. Matusz, 2025 4  England’s PPF If England is in autarky, Quantity of Cloth 500 it must produce 450 Initial production and consumption whatever it wishes to 400 (100 wine & 150 cloth) consume 350 300 250 New production and 200 consumption (150 wine & 0 cloth) If England wishes to 150 consume more wine, it 100 can only do so by producing more wine 50 0 0 20 40 60 80 100 120 140 160 which comes at the Quantity of Wine expense of producing (and consuming) less cloth January 16, 2025 (c) Steven J. Matusz, 2025 5  England’s PPF Suppose instead that Quantity of Cloth 500 England could produce 450 Initial production and consumption some more cloth, sell it 400 (100 wine & 150 cloth) to someone in Portugal, 350 and use the proceeds to 300 buy Portuguese wine 250 200 For concreteness, 150 suppose the price of 100 wine is £2 per unit and the price of cloth is £1 50 0 0 20 40 60 80 100 120 140 160 per unit Quantity of Wine January 16, 2025 (c) Steven J. Matusz, 2025 6  England’s PPF E.g., produce only cloth, Quantity of Cloth 500 New production with sell 300 units for a total 450 trade (0 wine & 450 cloth) of £300, and use that 400 New consumption with trade (150 wine money to buy 150 units 350 & 150 cloth) of wine 300 250 200 The consumption and 150 Initial production production points no 100 and consumption (100 wine & 150 longer coincide, and England can consume 50 cloth) 0 0 20 40 60 80 100 120 140 160 more wine without any Quantity of Wine less cloth compared with autarky January 16, 2025 (c) Steven J. Matusz, 2025 7  England’s PPF What makes this Quantity of Cloth 500 New production with example work isn’t the 450 trade (0 wine & 450 cloth) exact prices of £2 for 400 New consumption with trade (150 wine wine and £1 for cloth, the important part is & 150 cloth) 350 300 that the price of wine is 250 less than 3x the price of 200 The clothopportunity cost of 150 Initial production wine is 3 cloth; so, any 100 and consumption (100 wine & 150 price of wine that is less than 3x the price of 50 cloth) 0 0 20 40 60 80 100 120 140 160 cloth makes it a good Quantity of Wine deal to produce less wine and buy more on the market January 16, 2025 (c) Steven J. Matusz, 2025 8  In our example, the price of wine is £2, the price of cloth is £1, so the value of one unit of wine is the same as the value of 2 units of cloth By definition, the price of wine in terms of Relative Price: The price of one cloth is 2 (or we might good expressed in terms of say the price of wine another; e.g., the price of wine in terms of cloth is 2 is 2 cloth) January 16, 2025 (c) Steven J. Matusz, 2025 9  For England, the opportunity England’s PPF Quantity cost of wine is 3; the price of of Cloth 500 wine in terms of cloth in the 450 Initial production and consumption world market is 2. It pays to 400 (100 wine & 150 produce as much cloth as cloth) 350 possible and export it in return for wine 300 250 200 Another way of figuring out the 150 same thing: the opportunity 100 cost of cloth is 1/3 wine. This is less than the price of cloth in 50 terms of wine in the market 0 0 20 40 60 80 100 120 140 160 (1/2); again suggesting that England should produce as Quantity of much cloth as possible and sell Wine it in return for buying wine January 16, 2025 (c) Steven J. Matusz, 2025 10 The same principles apply Portugal’s PPF to Portugal. They should Quantity 500 of Cloth produce as much wine as 450 New consumption with trade (50 wine possible and export for 400 & 300 cloth) whatever cloth they want if 350 the price of wine in terms of Initial production and consumption 300 cloth is bigger than their (50 wine & 150 cloth) opportunity cost of wine 250 In this case, the opportunity 200 cost of wine production is 1 150 New production with trade (200 wine & 0 cloth. If the price of wine in 100 cloth) terms of cloth is 2, they can 50 import 2 units of cloth for 0 0 50 100 150 200 250 every unit of wine that they export. Quantity of Wine January 16, 2025 (c) Steven J. Matusz, 2025 11  This must be true in each country separately if there is no trade (i.e., British demand for cloth must equal British supply of cloth; etc.) With trade, there is a single world market such that the world demand for cloth must equal the world supply of cloth Without trade, the price of wine can be different in the two countries; but they must be the same with trade (assuming no In equilibrium, prices trade costs or other barriers) must adjust so that the The same is true of the price of demand for each good cloth; it can differ between must equal its supply countries without trade, but not with January 16, 2025 (c) Steven J. Matusz, 2025 12 Let and represent the prices of wine and cloth expressed in monetary terms (e.g., £2, ) The price of wine in term of cloth is written as Similarly, the price of cloth in In autarkic equilibrium, the terms of wine is price of wine in terms of cloth must equal the opportunity cost of producing wine January 16, 2025 (c) Steven J. Matusz, 2025 13 Suppose in autarky that in Alternatively, suppose in England (where the autarky that in England opportunity cost of wine is 3) Everyone would want to Everyone would want to produce wine, selling some of produce cloth, selling some it to buy cloth of it to buy wine But there is no cloth being But there is no wine being produced, so demand would produced, so demand would be bigger than supply of be bigger than supply of wine cloth This cannot be an equilibrium This cannot be an equilibrium January 16, 2025 (c) Steven J. Matusz, 2025 14 Use subscripts , , and to refer to Suppose autarky prices and world prices with trade In our example, This is lower than the opportunity cost of wine in either country, so no country would produce wine It must be the case that It would not be possible for demand to equal supply for wine (since there is a positive demand for wine) January 16, 2025 (c) Steven J. Matusz, 2025 15 Use subscripts , , and to refer to Suppose autarky prices and world prices with trade In our example, This is higher than the opportunity cost of wine in either country, so both countries would produce only wine and no cloth It must be the case that It would not be possible for demand to equal supply for cloth (since there is a positive demand for cloth January 16, 2025 (c) Steven J. Matusz, 2025 16  The world relative price must be different from at least one of the autarky relative price, so at least one country specializes with trade Since the price of wine in terms of cloth is at least as big as the opportunity cost of wine in Portugal, Portugal will be the exporter of wine (the good for which it has a comparative Since England must pay for advantage) With trade, each country imports of wine with something, exports the good in which it it will be the exporter of cloth has a comparative advantage and imports the other (the good in which it has a comparative advantage) January 16, 2025 (c) Steven J. Matusz, 2025 17  Improvement in Terms of Trade: Terms of Trade: The price of a A country’s terms of trade country’s imported good improve (deteriorate) if imports relative to the price of the good become less expensive relative that it exports to exports January 16, 2025 (c) Steven J. Matusz, 2025 18  England’s Consumption Quantity Possibilities of Cloth 500 450 400 350 300 250 Price of Wine in 200 Terms of Cloth = 1 Price of Wine in 150 Terms of Cloth = 2 100 An improvement in a country’s 50 terms of trade increases the benefit of trade to that country 0 0 Price of Wine in 50 100 150 200 250 300 350 400 Terms of Cloth = 3 while reducing the benefit to its trading partner Quantity of Wine January 16, 2025 (c) Steven J. Matusz, 2025 19  Portugal’s Consumption Quantity Possibilities of Cloth 500 Price of Wine in 450 Terms of Cloth = 3 400 350 300 250 Price of Wine in Terms Price of Wine in of Cloth = 2 200 Terms of Cloth = 1 150 100 An improvement in a country’s 50 terms of trade increases the benefit of trade to that country 0 0 50 100 150 200 250 while reducing the benefit to its trading partner Quantity of Wine January 16, 2025 (c) Steven J. Matusz, 2025 20  An economy’s CPF is identical to its PPF in autarky With trade, the economy’s CPF is identical to its CPF with autarky if the relative price with trade is the same as the autarkic relative price Consumption Possibilities With trade, the economy’s CPF Frontier: A budget constraint showing the maximum amount lies entirely outside the CPF of one good that an economy with autarky (except for one can consume for every quantity point) if the relative price with of the other trade is different than the autarky relative price January 16, 2025 (c) Steven J. Matusz, 2025 21