American University U.S. Transportation Equipment Sector Questions Look and finish the problem below……………………………………………….

American University U.S. Transportation Equipment Sector Questions Look and finish the problem below…………………………………………………………….. 1. Consider the following information for the U.S. Transportation Equipment sector (actual data
for 2004 in billions of dollars, from www.bea.gov):
Exports
Imports
88.2
228.2
50.3
27.0
Automotive (cars, trucks,
buses & parts)
Aircraft (airplanes and parts)
a. Calculate the Grubel-Lloyd index of intra-industry trade (Bi) for each sector (automotive and
aircraft) separately and also for total trade in transportation equipment (the sum of automotive
plus aircraft). How do the indexes for the individual sectors compare with the total? Discuss
and explain your results.
b. Suppose you discover that a large portion of the automotive imports are labor-intensive parts
rather than finished cars, while the exports are mostly capital-intensive finished vehicles. How
would this change your impression as to whether the U.S. has “intra industry” versus “interindustry” trade in automotive products? How would the finding that automotive imports are
labor intensive parts and exports are capital intensive finished goods affect your view of the
likelihood that job displacement due to trade would occur?
2. Consider a Heckscher-Ohlin model of US trade with East Asian newly industrializing
countries (China, Korea, Taiwan, etc., which we’ll call “EA”). Suppose that the two factors of
production are capital (K) and labor (L). The price of capital is denoted by r and the wages of
labor are w. The U.S. is capital-abundant. There are two goods, X (electronic gadgets) and Y
(heavy machinery), and good X is labor-intensive.
a. Give precise definitions of what it means for the U.S. to be capital-abundant and for good
X to be labor-intensive in this model. Can you tell from this information which “country”
(US or EA) has absolutely more capital? More workers? Why or why not?
b. Draw the production possibility frontiers (PPFs) and demand curves for the two countries,
showing the autarky [no trade] equilibria (consumption and production points) as well the
autarky relative prices and the free trade relative prices, production, and consumption points.
Show which country has a comparative advantage in each good and explain.
c. Analyze the predicted effects of free trade on income distribution in the US and EA using the
Stolper-Samuelson theorem. Which factor owners are predicted to gain or lose in each
country? Why? Should trade liberalization between the US and EA lead to more or less
inequality, in the US and EA, according to this model? Discuss and draw diagrams showing
predicted changes in factor prices. (You may assume that capital owners are richer than
workers to begin with.)
1
d. Suppose there is no free trade, but labor can migrate freely from one country to another.
Which way would workers migrate? Why? What if capital were mobile—which country
would capital move out of and which country would it be invested in? Why? How would the
distributional effects of such factor mobility compare with the effects of trade discussed in
part c.?
3. Suppose that there are two factors of production, capital and labor, and that there are two
industries, capital-intensive airplanes and labor-intensive automobiles, in the U.S. economy.
Thus, there are four groups of factor owners:
Airplane capitalists (Boeing stockholders)
Automobile capitalists (GM & Ford stockholders)
Airplane workers
Automobile workers
a. If the U.S. is capital-abundant and the Heckscher-Ohlin theory is true (assuming factor
mobility), what is the predicted direction of trade that is what does the U.S. export and
import?
i. In this case, which groups of factor owners do you expect will favor free trade and
which will favor protection? Why? Explain.
b. Now consider what happens if there are one or more “specific” factors—who will be the
winners and losers from trade under each of the following conditions (if some group’s
gains depend on what that group consumes, state who and explain why):
i. Capital and labor are both immobile, i.e., “specific” to each industry.
ii. Labor is mobile between the two industries, but the capital in each sector is
specific and immobile (e.g., because of different types of machinery and
equipment). Also, workers mainly consume automobiles not planes, meaning
they spend more on automobiles than plans.
iii. Reverse of ii: Capital is mobile between the two industries, but labor (which has
sector-specific skills) is immobile. Capital mainly consumers planes versus
automobiles.
c. Now suppose instead that this trade follows a Krugman model of intra-industry trade (IIT)
with scale economies, and that automobiles and airplanes are “differentiated products.”
Who would gain from the trade—and how would they gain? would there be any losers?
Discuss.
2
1. Answer the following questions based on the below diagram of the U.S. steel industry.
For simplicity, you may assume that the United States is a “small country” (except in part
c.), and please note that the precise numbers in this question are strictly hypothetical.
U.S. Steel Market
Domestic
Supply
Price
($/ton)
Domestic
Demand
400
330
300
80
88
100
130
142
142
150
Quantity of Steel
(in Millions of tons)
a. Suppose that, between 1996 and 2000, the world price of steel fell from $400 to $300 per
ton, due to a global glut of steel resulting from financial crises in steel-exporting nations
along with the appreciation of the U.S. dollar at the time. Assuming that the United States
had free trade in steel during those years, calculate the effects (gains or losses in “surpluses”)
on U.S. consumers and producers of steel and the net gain or loss to the U.S. economy.
Hint: To calculate the change in CS as price drops from $400 to $300, you need to add the
area of the rectangle formed by the original quantity (130) with price of $400 and the $100
change in price to the area of the triangle formed with the base being the difference between
the old quantity (130) at the price of $400 and the new quantity (150) at the price of $300.
The area of a triangle is (1/2 *base * height) and the area of a rectangle is (base * height).
Hint: For PS, we need to find the change in area above the supply curve and between the
price of $300 and $400. To do this, draw an imaginary line up from quantity 80 to the price
of $400. This will create a rectangle of interest (base 80 and height 100) and a triangle (base
20 and height 100).
b. Then, in 2001, the United States imposed a “safeguard” tariff of 10% on imports of steel.
Assuming that the world price remained at $300 per ton, calculate the effects of the tariff on
U.S. consumers, producers, the government, and the net gain or loss.
1
i.
Which part(s) of this analysis would you focus on if you were trying to prove the
legal case for a safeguard tariff at the International Trade Commission (ITC)? Which
part(s) of this would you focus on if you were opposed to the tariff? (Hint: look at
your answers in part b to consider winners and losers)
c. How might your answer to part b. be different if the U.S. was a “large country” in the global
steel market (Hint, this will cause a terms of trade effect)? Indicate generally (exact
calculations are not required, but you should draw a graph showing the terms of trade effect).
d. Both “workers” (labor) and “capitalists” (owners of the firms/capital) in the U.S. steel industry
supported the “safeguard” protection in 2001. Please explain considering the theorems within
the Heckscher-Olin model.
e. What if the government decided to impose a tariff rate quota. Show the results graphically (no
calculations necessary) to include the net welfare effects if i) imports were less than the
quota, ii) imports were greater than the quota. Indicate the returns to the government and / or
quota rents in both examples. Who receives the quota rents?
2
2. Refer to the graph in #3. Assume that the price of steel from Korea is $300 per ton and
the price of steel from Brazil is $330.
a. Assume the US originally placed a 33% tariff on Korean and Brazil steel. Then the US
engages in a trade preferential trade agreement with Brazil, which removes the tariff on
Brazilian steel. Will the agreement result in trade diversion or trade creation. Show the
result by calculating the area of consumer surplus, producer surplus and change in
government revenue.
b. Repeat a, but assume that the US engages in a preferential trade agreement with Korea
instead of Brazil. Will this agreement result in trade diversion or trade creation? Show
the result by calculating the area of consumer surplus, producer surplus and change in
government revenue.
3

Purchase answer to see full
attachment