Copyright 2013 John Wiley Sons, Inc. 1-1

Copyright © 2013 John Wiley & Sons, Inc. 1-1

Chapter 1: A Second Wave of Globalization

Teaching notes.

This chapter has three aims: (i) Introduction of some of the most important historical trends collectively described as ‘globalization,’ along with a definition of that term in its various forms.(ii) Introduction of the core concept of the three big reasons for trade, which provide the three branches of trade theory and thus the three big branches of the ‘family tree of trade models,’ provided at the end of the book and which serves as a map to the theories presented throughout the text. (iii) Provide some familiarity with some basic stylized facts regarding globalization worldwide. The last of these is partly relegated to the spreadsheet problems at the end of the chapter. In case there are students who are not familiar with basic spreadsheet operations, it may be useful for a TA to provide an optional tutorial on their use, but the great majority of undergraduates are conversant enough with spreadsheets to do these problems without help.The family tree is likely to be a great aid to students in keeping track of the relationships between the various models as the course goes on, and so it is recommended to introduce them to it at some point in class.

Solutions.

Problem 1-1 (Note: Clearly there is no one correct answer to this question.) The improvement of the technologies for tracking and shipping, such as bar code scanners and software, has lowered trade costs by allowing for easier and faster transportation. Another example is the development of technologies allowing for better conservation of perishable goods.

A policy that promotes globalization is the end of the Multifibre arrangement, a system of quotas restricting the exports of textiles and garments from developing to developed nations. This system ended the first day of 2005. Another is the European Union’s Everything But Arms initiative, entered into in 2001, under which developing country exports can enter the EU duty- free (except, of course, for armament, as the name implies).

Problem 1-2 (Note: See accompanying spreadsheet for more detail. It is recommended that students do not hand in a spreadsheet or printouts from a spreadsheet, but rather present a brief report on their findings from the spreadsheet with a level of detail roughly comparable to what is presented here.)

The average level of openness in the world increased between 1971 and 2001, from 54.8% to 80.0%. It had a slight fall between 1981 and 1991. Openness in each year is calculated in columns AA through AD in the spreadsheet, and the average across countries for each year is shown at the top.

(International Trade 1e John McLaren) (Instructor Manual) 1 / 4

McLaren – International Trade Solutions Copyright © 2013 John Wiley & Sons, Inc. 1-2

Problem 1-3

Out of 105 countries in the sample, openness between 1991 and 2001 increases in 79 of them.The rest, 26, experience a decrease. Column AG in the spreadsheet has a "1" for countries where openness increased between these years, and a 0 for the countries where it decreased.

Problem 1-4

The 20 largest and 20 smallest countries in terms of population (in 2001) are shown in column AJ. Their openness is shown in column AL. Average openness (in 2001) for the 20 largest countries is 54.4%, and for the 20 smallest, 118.2%.

Problem 1-5

The 20 richest and 20 poorest countries in terms of GDP per capita (in 2001) are shown in column AP. Their openness is shown in column AR. Average openness (in 2001) for the 20 richest countries is 1.003, and for the 20 poorest, 0.603.

Problem 1-6

Based on the results found above, smaller and richer countries tend to be more open. Smaller countries tend to produce a more narrow range of products and thus meet more of their consumption needs through imports. The relationship between wealth and openness is harder to disentangle. It could potentially mean that trade promotes growth and open countries become rich – a possibility explored in Chapter 9. It could also mean that wealthier countries have better policies in general, and that having low barriers on trade is an example of that, or that consumers in wealthier countries consume a broader range of consumption goods other things being equal and so tend to import a larger fraction of their consumption. 2 / 4

McLaren – International Trade Solutions Copyright © 2013 John Wiley & Sons, Inc. 2-1 Chapter 2 Should Nigeria Strive for Self-Sufficiency in Food?

Teaching notes.

This chapter presents the Ricardian model in a way that is motivated by the actual policies and governmental philosophy adopted for several years by the government of Nigeria. The model that emerges is technically the same as the standard 2x2 England-Portugal, wine and cheese model, but it emerges out of a real-world context that is more gripping for contemporary students. One detail that many students sometimes find difficult is the derivation of the world RS curve, and in particular why it has a vertical portion, and how one computes the location of the vertical portion. This needs particular care in a classroom presentation. In addition, in the big computational problem at the end of the chapter, in problem 7, students need to find the world free-trade equilibrium, which involves one tricky subtlety: The equilibrium could in principle involve incomplete specialization for either country (on the flat parts of the world RS curve) or complete specialization for both (the vertical part of the world RS curve). In general, one needs to check which kind of equilibrium applies to the particular case at hand. It is recommended that students guess that it is a complete specialization equilibrium, calculate the world relative price accordingly, and check that this relative price lies between the autarky prices for the two countries. If it does, then the guess is correct, and complete specialization applies; otherwise, incomplete specialization applies.

Solutions.

Problem 2-1

(Note: Clearly there is no one correct answer to this question.) Another important difference across countries that could generate comparative advantage comes from endowments. It is natural that countries that have large oil reserves, such as Nigeria and Saudi Arabia, will export oil, while countries with a large surface of farmland, such as Argentina and Australia, will export agricultural products. Infrastructure differences can affect comparative advantage; a country with a well-developed electrical grid can have an advantage in industries that require a steady stream of electricity, for example. Human capital, meaning a highly-educated workforce, can lead to a comparative advantage in industries that require a highly-skilled workforce. This last point will be explored in detail in Chapter 6. More subtly, countries with a well-functioning legal system can have a comparative advantage in industries where contract enforcement between firms and their suppliers is particularly important, a point explored in recent work by Nathan Nunn.

• / 4

McLaren – International Trade Solutions Copyright © 2013 John Wiley & Sons, Inc. 2-2 Problem 2-2

(Note: Clearly there is no one correct answer to this question.) It does not seem realistic that no-one would have a reason to object to trade, given the large amount of political conflict we observe over trade policy in practice. This feature of the Ricardian model depends on a number of assumptions that make the model simpler. One is that the only factor of production is labor.If some Nigerians are workers but others own capital or land, the incomes of these groups could be affected very differently by trade, and there is likely to be at least one group that is made worse off by trade. These issues are explored in great detail in Chapters 5 and 6. A second assumption is that labor is homogeneous. If, for example, some workers are particularly talented at producing rice and others at cocoa, then we would tend to see some workers producing rice and others producing cocoa even under trade, and those who are particularly good at producing the import-competing good will tend to be made worse off by trade. Finally, a crucial assumption is the assumption that labor is freely mobile across the two goods. If it is costly for a worker to switch from production of one good to the other, workers who are initially in the sector that produces the imported good will tend to be hurt by trade. This is explored in Chapter 5. Relaxing any of these assumptions will help explain political opposition to trade by a portion of the population.

Problem 2-3

Finland has an absolute advantage in both goods. Finland has a lower opportunity cost of producing wheat than Iceland, so they have a comparative advantage in wheat, while Iceland has a comparative advantage in Fish.

Problem 2-4 The equilibrium relative price in Iceland is P F P W =1 under autarky. In Finland, P F P W =2 .The way to find this is the following. A worker in the fish sector in Finland earns 2 F P , and a worker in the wheat sector earns 4 W P . Workers in Finland, which are all the same, will choose to produce Fish if their income in that sector is larger, that is, if >2 F W P P . They will produce wheat if <2 F W P P . This gives us the relative supply curve under autarky for Finland, shown in the following graph.

• / 4