Economics 161 — Fall 2010International Integration of Latin American EconomiesReview Sheet 1: Trade IntegrationApril 1, 2010Instructor: 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. Mexico and California grow almonds and produce cars.Mexico’s workers can produce 300,000 cars and grow 15 million almonds,while California’s workers can produce 1 million cars and grow 20 mil-lion almonds. In your argument, start from a point of autarky and openmarkets to international trade. What are Mexico’s and California’s oppor-tunity costs of car manufacturing in terms of coffee? What is the patternof trade? If the world price is 1 car for 30 coffee, how many cars willMexico Mexico make, and how many cars will California make? In youranalysis, demonstrate that there are gains from trade for both Californiaand Mexico.3. Heckscher-Ohlin trade. What will happen to real wages for banana growersand car-making workers in Mexico and California under the assumptionthat banana growing is low-skill intensive, car manufacturing is high-skillintensive, Mexico is low-skill labor-abundant and California 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 its Effects on TradeGiven differences in per-capita incomes, trade may not suffice to bridge the gapin consumption levels between unequal regions. Consider Mexico and California.Mexico has a lower per-capita income than California. [You may use numericexamples, graphs, or clear verbal arguments for any of your answers.]1. Explain how Mexico could attempt to bridge the consumption gap thatremains to California.2. How do the terms of trade respond when Mexico 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 Mexico. Ex-plain how “immiserizing growth” may come about. Will Mexico 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 sources for external economies of scale. [You may try toavoid examples from class; as is generally the case, thinking of own exampleshelps solidify ideas.]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 answers.]7 Trade and its Potential Effects on GrowthState three main sources of growth. Which of the three is arguably the mostlasting source?There are several mechanisms by which trade may affect productivity change.[You may use numeric examples, graphs, or clear verbal arguments for any ofyour answers.]1. Suppose there are external economies of scale, driven by free entry intoindustrial clusters. Explain how comparative advantage changes over timeas entrants join a cluster.2. Suppose there is learning by doing in a model with multiple goods andproductivity differences across countries. Explain how the pattern of com-parative advantage changes over time as each trading partner learns bydoing.3. Define the Balassa (1965) measure of comparative advantage. Applying itto Latin American economies, does there appear to be lock-in of compar-ative advantage? What is the impact of adjustment costs and temporarilyidle production factors after trade reform on growth?8 Trade AgreementsRegional and bilateral trade agreements may complement or conflict with mul-tilateral trade agreements.1. With what rationale does the World Trade Organization support the pro-motion of regional trade agreements?2. Discern between trade creation and trade diversion and explain how ra-tional trade agreements may create or divert trade.3. A narrow argument for protectionism is that trade restrictions may im-prove a large economy’s terms of trade. Assess to what extent regionalor multilateral trade agreements can resolve the coordination problem