Economics 161 — Fall 2005International Integration of Latin American EconomiesReview Sheet 1: Trade IntegrationApril 5, 2007Instructor: Marc-Andreas MuendlerE-mail: [email protected] Import Substitution IndustrializationFor what motives and when did Latin America pursue Import SubstitutionIndustrialization (ISI)? Outline three arguments in favor of ISI.What were key objectives of ISI? Argue for or against the success of ISIwith regard to those objectives. There are alternative policies to ISI that mightachieve key objectives differently. Argue for or against their possible success inLatin America.2 Trade Patterns and Gains from TradeThe Ricardian and Heckscher-Ohlin theories of international trade stress differ-ent aspects of comparative advantage. [You may use numeric examples, graphs,or clear verbal arguments for any of your answers.]1. Discuss prime differences between the Ricardian and the Heckscher-Ohlintheory of trade. State their main predictions for the pattern of trade.2. Ricardian trade. Ecuador and Oregon grow bananas and produce cars.Ecuador’s workers can produce 300,000 cars and grow 15 million bananas,while Oregon’s workers can produce 1 million cars and grow 20 millionbananas. In your argument, start from a point of autarky and open mar-kets to international trade. What are Ecuador’s and Oregon’s opportunitycosts of car manufacturing in terms of bananas? What is the pattern oftrade? If the world price is 1 car for 30 bananas, how many cars willEcuador make, and how many cars will Oregon make? In your analysis,demonstrate that there are gains from trade for both Oregon and Ecuador.3. Heckscher-Ohlin trade. What will happen to real wages for banana growersand car-making workers in Ecuador and Oregon under the assumptionthat banana growing is low-skill intensive, car manufacturing is high-skillintensive, Ecuador is low-skill labor-abundant and Oregon is high-skilllabor-abundant?13 Inequality and TradeInternational trade affects the distribution of incomes within trading countries.[You may use numeric examples, graphs, or clear verbal arguments for any ofyour answers.]1. Explain the difference between measures of poverty and income inequality.Can poverty decline in the presence of increasing income inequality?2. By many measures, income inequality in Latin America has become moreextreme over the past decades. Discuss two reasons [of your choice] whyinternational trade may have been a cause. Offer two alternative reasons[of your choice] why international trade may not have been the cause forworsening income inequality.4 Growth and TradeGiven differences in per-capita incomes, trade may not suffice to bridge the gapin consumption levels between unequal regions. Consider Ecuador and Oregon.Ecuador has a lower per-capita income than Oregon. [You may use numericexamples, graphs, or clear verbal arguments for any of your answers.]1. Explain how Ecuador could attempt to bridge the consumption gap thatremains to Oregon.2. How do the terms of trade respond when Ecuador increases its labor pro-ductivity in the export sector? Will it still reap gains from trade?3. The possibility of “immiserizing growth” causes concern in Ecuador. Ex-plain how “immiserizing growth” may come about. Will Ecuador still reapgains from trade under “immiserizing growth”?5 Trade in Primary and Agricultural GoodsTrade in primary commodities and agricultural merchandize poses special chal-lenges to an exporting country. Discuss three reasons [of your choice] why worldmarkets for these commodities are different from other markets. For the threecauses you discuss, offer economic policies that could alleviate or remove thechallenges.6 External EconomiesGive two examples of external economies of scale. [You may try to avoid exam-ples from class; as is generally the case, thinking of own examples helps solidifyideas.]2Brazil has a large domestic consumer market and wants to launch a micro-processor chip industry. No entry occurs although average Brazilian productioncosts would be lower than anywhere else in the world at any given scale. TheBrazilian government hires you as a consultant. Explain why the Brazilianmarket is empty. What policy options can you offer the Brazilian government?What are their advantages and disadvantages? For how long should the poli-cies remain in place? [You may use numeric examples, graphs, or clear verbalarguments for your