Posted: May 13th, 2018

Fall2014 Econ471-The following table provides data on the Labor hours per unit of production of two goods

Fall2014
Econ 471 

Problem Set #4

COVER PAGE TO PROBLEM SET #4

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While you are permitted to work together as a group, you must write out
the answers on your own (preferably in a separate room) without any help from
those in the group. Problem sets with
similar answers in any question will receive a grade of zero.

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and I have not provided help to other students in writing up the answers to
this problem set.

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Unless your handwriting is clear and
impeccable, you must turn in typed answers to the
problem sets. Hard copies of your answers will be handed in the beginning of class onTuesday, Nov 18. No late problem sets will be
accepted.

1. The
following table provides data on the Labor
hours per unit of production of two goods, cell phones and TVs in the two
countries, U.S. and Brazil.

Country

Cell Phones

TV

Opportunity cost of producing one TV

U.S.

5

10

Brazil

12

12

a. Complete the last
column of the table above.

b. Compared to
Brazil, the US is more efficient in producing both goods. Why does it still benefit the U.S. to trade
with Brazil?

c. Pick a feasible
terms of trade and show and explain how the U.S. can benefit from trading with
Brazil at the chosen terms of trade.

2. In the late 1980s, Vietnam went from an
essentially closed economy to one that is highly integrated with the world
economy in terms of trade in goods and services. Since 1990, the growth in GDP per capita in Vietnam
has been exceptional reaching double digits. Use the following simplifying
assumptions to answer questions a) to c):
l Vietnam produces two goods: rice (labor intensive) and computers (capital
intensive).
l Vietnam is relatively labor abundant, and
the domestic price of rice relative to price of computers is lower than that in
the world market.
l Resources used in production can move
across sectors when economic conditions change.

a.
Which good does
Vietnam export? Which good does it import?

b.
Using
the tools discussed in class, show graphically the change in overall welfare in
Vietnam from liberalizing its trade policy.
Your graph should use a two-good framework with the good that Vietnam
exports on the x-axis and its importable good on the y-axis.

c.
Who
are the winners and losers in Vietnam from this change in trade policy?

3.
In
China, three members of a family own a small business. They can hire up to two
more people to work in their business. Each worker is paid $300. The total
output per year depends on the number of members working in the business that
year. Total annual income (or value of output) is represented by the following
chart.

Number working on firm

Total Business Output (in $)

MPL

1

900

900

2

1700

800

3

2300

600

4

2700

400

5

2900

200

Each member of the family has the opportunity to
migrate to the nearest city where there are two different types of jobs.
Informal jobs are available to everybody and pay $200. Formal sector jobs are
more difficult to get and pay $800. The probability of finding a job in the
formal sector is 60%. For questions A-C, suppose that there are no costs of
migration.
a.
Suppose all three members of a family were to
work in the business. How many workers should the family hire to maximize
business Profit? Show your work.

b.
What is the expected wage in the city? Show
your work.

c.
Show that the business maximizes total family
income by sending two of their family members into the city, letting one stay
on the farm and hiring two workers.

4.
Consider
a country with production function.gif”>, savings rate.gif”>, and capital depreciation rate.gif”>.
a.
What
is the level of capital per worker (.gif”>) and output per worker (.gif”>) when the country is closed to capital flows? (Hint:
Solow model)

b.
What
is the level of.gif”> and.gif”> when the county
becomes perfectly open to capital flows? Assume the world rental rate of
capital is.gif”>. Show your derivations. (Hint: free-capital-flow
model we discussed in class, Weil Ch.11)

c.
Use
your answers to a) and b), explain why higher savings rates are associated with
higher levels of GDP in a closed economy, but they are not in an open economy.

d.
Does
the statement in c) mean that if you save a lot, you are better off in a closed
economy? Why or why not?

5.
Read the following
article on immigration and answer the following questions
a.
Explain the term
“brain drain”? Why is it an issue to the policymakers in poor countries?

b.
Explain the term
“brain gain”? What is the key aspect that turns “brain drain” into “brain
gain”?

c.
Besides direct
remittance (sending income back to home country), name two other sources of
potential gains to the sending country from skilled emigration.

Drain or gain? Poor countries can end up benefiting when
their brightest citizens emigrate
Economics focus | May 26th 2011 | from the print
edition

WHEN people in rich countries worry about migration,
they tend to think of low-paid incomers who compete for jobs as construction
workers, dishwashers or farmhands. When people in developing countries worry
about migration, they are usually concerned at the prospect of their best and
brightest decamping to Silicon Valley or to hospitals and universities in the
developed world. These are the kind of workers that countries like Britain,
Canada and Australia try to attract by using immigration rules that privilege
college graduates.

Lots of studies have found that well-educated people
from developing countries are particularly likely to emigrate. By some
estimates, two-thirds of highly educated Cape Verdeans live outside the
country. A big survey of Indian households carried out in 2004 asked about
family members who had moved abroad. It found that nearly 40% of emigrants had
more than a high-school education, compared with around 3.3% of all Indians
over the age of 25. This “brain drain” has long bothered policymakers in poor
countries. They fear that it hurts their economies, depriving them of much-needed
skilled workers who could have taught at their universities, worked in their
hospitals and come up with clever new products for their factories to make.

Many now take issue with this view (see article).
Several economists reckon that the brain-drain hypothesis fails to account for
the effects of remittances, for the beneficial effects of returning migrants,
and for the possibility that being able to migrate to greener pastures induces
people to get more education. Some argue that once these factors are taken into
account, an exodus of highly skilled people could turn out to be a net benefit
to the countries they leave. Recent studies of migration from countries as far
apart as Ghana, Fiji, India and Romania have found support for this “brain
gain” idea.

The most obvious way in which migrants repay their
homelands is through remittances. Workers from developing countries remitted a
total of $325 billion in 2010, according to the World Bank. In Lebanon,
Lesotho, Nepal, Tajikistan and a few other places, remittances are more than
20% of GDP. A skilled migrant may earn several multiples of what his income
would have been had he stayed at home. A study of Romanian migrants to America
found that the average emigrant earned almost $12,000 a year more in America
than he would have done in his native land, a huge premium for someone from a
country where income per person is around $7,500 (at market exchange rates).

It is true that many skilled migrants have been
educated and trained partly at the expense of their (often cash-strapped)
governments. Some argue that poor countries should therefore rethink how much
they spend on higher education. Indians, for example, often debate whether
their government should continue to subsidise the Indian Institutes of Technology
(IITs), its elite engineering schools, when large numbers of IIT graduates end
up in Silicon Valley or on Wall Street. But a new study of remittances sent
home by Ghanaian migrants suggests that on average they transfer enough over
their working lives to cover the amount spent on educating them several times
over. The study finds that once remittances are taken into account, the cost of
education would have to be 5.6 times the official figure to make it a losing
proposition for Ghana.

There are more subtle ways in which the departure of
some skilled people may aid poorer countries. Some emigrants would have been
jobless had they stayed. Studies have found that unemployment rates among young
people with college degrees in countries like Morocco and Tunisia are several
multiples of those among the poorly educated, perhaps because graduates are
more demanding. Migration may lead to a more productive pairing of people’s
skills and jobs. Some of the benefits of this improved match then flow back to
the migrant’s home country, most directly via remittances.

The possibility of emigration may even have beneficial
effects on those who choose to stay, by giving people in poor countries an
incentive to invest in education. A study of Cape Verdeans finds that an increase
of ten percentage points in young people’s perceived probability of emigrating
raises the probability of their completing secondary school by around eight
points. Another study looks at Fiji. A series of coups beginning in 1987 was
seen by Fijians of Indian origin as permanently harming their prospects in the
country by limiting their share of government jobs and political power. This
set off a wave of emigration. Yet young Indians in Fiji became more likely to
go to university even as the outlook at home dimmed, in part because Australia,
Canada and New Zealand, three of the top destinations for Fijians, put more
emphasis on attracting skilled migrants. Since some of those who got more
education ended up staying, the skill levels of the resident Fijian population
soared.

Passport to riches

Migrants can also affect their home country directly.
In a recent book about the Indian diaspora, Devesh Kapur of the University of
Pennsylvania argues that Indians in Silicon Valley helped shape the regulatory
structure for India’s home-grown venture-capital industry. He also argues that
these people helped Indian software companies break into the American market by
vouching for their quality. Finally, migrants may return home, often with
skills that would have been hard to pick up had they never gone abroad. The
study of Romanian migrants found that returnees earned an average of 12-14%
more than similar people who had stayed at home. Letting educated people go
where they want looks like the brainy option.

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