International Trade

 

Total Points: 115

 Use the Turnitin links provided. First, convert your Word, STATA (log files), excel worksheets, and any other file you worked with, to pdf files.   Second, compile all your different pdf files into a unique pdf file. Use Adobe Acrobat, which allows merging different pdf files into one file.  Finally, name the pdf file “YOUR_FIRST_AND_LAST_NAME”.

 

Note: All data files are provided in STATA and EXCEL. The dataset in STATA contains the variables’ description (type “describe” in the command window). Get familiar with the structure of the data and the content of the dataset. Make sure you understand the information contained in each variable.

 

QUESTION 1 (Lab Work III). Chilean Exporters. 10 POINTS. Use “data-set-PS2-Q1.dta” to explore facts about exporters in Chile. These data are establishment-level data from the Chilean Annual Manufacturing Survey (ENIA), for the year 2000. You will document two facts: Fact 1) Exporters are larger than non-exporters; Fact 2) For most exporters, export activities are done at a low intensity. Attach the LOG file with your work.

The goal of this question is to get students to construct their own empirical evidence to clearly convey an argument to support a theory or a policy. Additionally, the question will get students familiar with firm-level data.

 

Fact 1

  1. 5 points. First, using the command “gen”, construct a dummy variable that equals 1 if the establishment has positive exports and zero if it has zero exports. Name it “d_exporter”. Second, using the command “gen”, construct export intensity as export sales divided by total sales of the establishment. Name this variable “export_intensity”. Finally, construct the log of total sales and the log of total employment. Name these variables, respectively, “log_sales”, and “log_employment”.

 

  1. 5 points. Use the command “kdensity” to plot the log of sales for exporters and non-exporters, respectively, in the same graph. Repeat the procedure for log of employment. You should have two graphs. Interpret each graph.

Fact 2

We will first restrict the sample to exporters only: keep observations where “d_exporter = 1” using the command “keep if”.

 

  1. 5 points. Use the command “kdensity” to plot “export_intensity”. Interpret. Where in the figure do you observe most of the establishments?

 

QUESTION 2. Trade Policy. 10 POINTS (2.5 points each). Choose one and only one answer.

 

  1. If a good is imported into (large) country H from country F, then a tariff in country H
  2. Raises the price in country H and cannot affect its price in country F.
  3. Lowers the price of the good in both countries.
  4. Lowers the price of the good in H and could raise it in F.
  5. Raises the price of the good in H and lowers it in F.
  6. None of the above.

 

  1. A lower tariff on imported steel would most likely benefit
  1. Foreign producers at the expense of domestic consumers.
  2. Domestic manufacturers of steel.
  3. Domestic consumers of steel.
  4. Workers in the steel industry.
  5. None of the above.

 

  1. The main redistribution effect of a tariff is the transfer of income from
  1. Domestic producers to domestic buyers.
  2. Domestic buyers to domestic producers.
  3. Domestic producers to domestic government.
  4. Domestic government to domestic consumers.
  5. None of the above.

 

  1. An important difference between tariffs and quotas is that tariffs
  2. Raise the price of the good.
  3. Generate tax revenue for the government.
  4. Stimulate international trade.
  5. Help domestic producers.
  6. None of the above.

 

QUESTION 3. Intertemporal trade. 25 points. [HARD]. Consider a two-period economy.  The representative agent has preferences represented by a utility function of the form . The agent is endowed with  units of the good in period 1 and y2 units of the good in period 2. Let  denote the return on a one-period bond, and  denote the quantity of bonds.

 

  1. 2 points. Write out the budget constraint for period 1 and a separate budget constraint for period 2.
  2. 2 points. Combine the two per-period budget constraints to form the intertemporal budget constraint.
  3. 4 points. Write out the consumer’s maximization problem (maximize utility subject to the intertemporal budget constraint. Take the first order conditions and derive the Euler Equation. [Hint: the Euler equation relates marginal utility in the two periods to 1+ the interest rate.]

 

  1. 4 points. Derive the consumer’s choice of consumption in the first period, , consumption in the second period, , and the amount of borrowing or lending b, as a function of y1, y2, and r.

 

  1. 4 points. Suppose that , , and .  What is the interest rate, , in the closed economy? What is the value of ?

 

  1. 3 points. Suppose there is another country, (the foreign country) whose preferences are identical to those in the first part of this question. This country has endowments of y*2 = 6 and , and   What is the interest rate in the closed foreign economy, ? What is the value of ?

 

  1. 3 points. When the home and foreign country open to trade, what will the world interest rate be?

 

  1. 3 points. Fill out the following table: (use the numerical values)
Time Home: Current Account Home: Financial Account
Period 1    
Period 2    

 

 

QUESTION 4. The Balance of Payments. 20 points. You are going to explore data from the Bureau of Economic Analysis (BEA) and variables related to national accounting.

 

Go to the BEA website: https://www.bea.gov/. Click on the tab “Tools” and select “Interactive Data”. Select “Int’l Transactions, Services, & IIP” under International Data. Click on “Begin using the data…” and download the following tables (in Excel or CVS format):

. Table 1.1: US International Transactions (from 1960, annual), located under the tab “International Transactions (ITA)”. Use the tab “Modify” to select all years available at annual frequency.

. Table 1.3: Change in the Year-end US Net international Investment Position (from 2003, annual), located under the tab “International Investment Position (IIP)”. Use the tab “Modify” to select all years available at annual frequency.

 

Go back to the “Interactive Data” page and select “GDP & Personal Income” under Domestic Data. Click on “Begin using the data…” and download the following table (in Excel or CVS format):

 

. Table 3.1: Government Current Receipts and Expenditures (from 1960, annual), located under the tab “Section 3: Government current receipts and expenditures”. Use the tab “Modify” to select all years available at annual frequency.

 

Work in Excel. Each question should be in a different clearly labeled tab. The data should be in the 3 first tabs (one for each of the tables above). Show your calculations.

 

The goal of this question is to get you familiar with the US Government agency that constructs the national account statistics. Most governments around the world have similar websites.

 

  1. 2 points. What was the US largest positive annual current account surplus since 1960, and in what year did this arise?

 

  1. 2 points. What was the US largest negative annual current account surplus since 1960, and in what year did this arise?

 

  1. 4 points. The United States ended 2002 with a net foreign debt of $2.4109 trillion. Use the data in Table 1.1 on the US current account balance to plot the evolution of the US’ net foreign debt implied by the path of the US current account balances over the period end of 2002 – end of 2016. Make sure to include a title and legend and clearly label the axis.

 

Note: To construct the US net foreign debt implied by the path of the US current account balances, over the given period, accumulate current account balances from 2003 to 2016, , and sum them to the net foreign debt of $2.4109 trillion accrued by the end of 2002.

 

  1. 4 points. On the same graph, plot the US net foreign debt, as estimated by the BEA in Table 1.3. Make sure to include a title and legend as well as clearly label the axis. How much did the flow of current account balances (calculated in c) contribute to the US’ net foreign debt by the end of 2016? Comment on what factors may have contributed to the difference between these two measures of the net US foreign debt.

 

  1. 4 points. Use the data on the composition of US foreign assets and liabilities in Table 1.3. What fraction of the US overseas assets in direct and portfolio investment were made up of equity at the end of 2016? What fraction of foreign direct and portfolio investment into the US was made up of equity at the end of 2016?

 

  1. 4 points. Use the data on the US government’s balance sheet in Table 3.1. Calculate the correlation between the US annual net government lending and the country’s current account balance over the period 1960 to 2016. Is there any relation? Should we observe a link between a country’s current account and government budget

 

QUESTION 5 (Lab Work IV). LOOP and Exchange Rates. 10 points. For this question, you will use the data on the Big Mac prices from the Economist, in “BigMac2000toJan2017-PS2-Q5.dta”. The file shows, for each country, the price of the Big Mac in local currency (“local_price”) as well as the nominal exchange rate observed at each date against the US$ dollar (“dollar_ex”) —our base currency. You will investigate whether (nominal) exchanges rate changes align with observed (nominal) exchange rate changes as predicted by the Law of One Price (LOOP). Attach the LOG file with your work.

 

  1. 1 point. Construct the nominal exchange rate, at each date and each country, as predicted by the Law of One Price (LOOP): Divide the price of the Big Mac in the local currency (“local_price”) by the price of the Big Mac in US$ (“local_price_us”). Call this variable “dollar_loop”. Use the command “gen”.

 

  1. 3 points. Pick a country from the file, except for the United States. Is the currency from your chosen country under-valuated or over-valuated according to our Big Mac Index, at each date? Use (-) for under-valuated and (+) for over-valuated. Proceed as follows: First, generate (“gen”) a dummy that is equal to 1 if “dollar_ex < dollar_loop” (meaning that the currency is overvalued) and equal to zero if “dollar_ex > dollar_loop” (meaning that the currency is undervalued). Second, use the commands “preserve”, “restore”, and “keep”, to keep data only from your chosen country. Finally, use the command “list” to visualize the outcome in your log file.

 

  1. 2 points. Calculate the depreciation/appreciation rate observed in the nominal exchange rate using “dollar_ex” and the command “gen”. Was the Big Mac Index a good predictor of future appreciations/depreciations of the currency? Why? Give two reasons.

 

  1. 4 points. Construct the “real exchange rate” using the Big Mac, for each country and each year: log qit = log pit – log eit – log put, where pit refers to the local price of the Big Mac in country i and year t (“local_price”); eit refers to the nominal exchange rate of the currency in country i against the US dollar in year t (“dollar_ex”); and put refers to the price of the Big Mac in the United States (in US dollars) in year t (“local_price_us”). Notice that, by construction, log qit =0 when i = USA. Use the command “gen”.

 

  1. Calculate the standard deviation (S.D.) of log qit, for each year in the period 2011-2016, across all countries and across the subset of countries that adopted the Euro, respectively. Did you observe any difference? Why? For these calculations, you will generate a dummy variable equal to one if the country belongs to the Euro zone, and equal to zero if it does not. To generate summary statistics, such as the S.D., you can use the command “sum” combined with the options “by” (by year), and “if” (whether the country belongs to the Euro zone or not).

 

  1. Price levels are linked to the level of development of countries. Plot the real exchange rate constructed in d) against real GDP per capita (relative to the United States), for the year 2014. First, calculate real GDP per capita relative to US’s as “rgdpl” divide by “rgdpl_us” using the command “gen”. Then, use the graph command “scatter”. Make sure to include a title and clearly label the axis. What correlation should we observe between these two variables according to the theory?

 

QUESTION 6. The Balassa-Samuelson Effect. 25 points.  The United States (US) and India (IND) can both produce tradable (T) and non-tradable (N) goods.  Both goods are produced using only labor and according to the following production function

,where j = T, N and I = US, IND. Labor productivities in year t for each good in each country are .

Assume the LOOP holds for traded goods but not for non-traded goods and that both goods are sold in competitive markets. The price of the traded good in year t is .

  1. 4 points. Using the condition that states that wages are equal to the value of the marginal product of labor, in the tradable sector, solve for the wage in the United States.

 

  1. 4 points. Using the condition that states that wages are equal to the value of the marginal product of labor, in the non-tradable sector, solve for the price of non-traded goods in the United States.

 

  1. 3 points. Solve for the wage and the price of non-traded goods in India. [Repeat the procedure in a) and b) for India.]

 

  1. 4 points. Consumers in the United States spend 50% of total expenditure on traded goods and 50% of total expenditure on non-traded goods. Assume that the price of traded goods in the base year is 1 and the price of non-traded goods in the base year is also 1. Compute the Consumer Price Index (CPI) in year t for the United States, CPIt,US. Show your work.

 

  1. 4 points. Consumers in India, however, spend 75% of total expenditure on traded goods and 25% of expenditure on non-traded goods. Assume that the price of traded goods in the base year is 1 and the price of non-traded goods in the base year is also 1.  Compute the CPI in year t for India, CPIt,IND. Show your work.

 

  1. 3 points. Define absolute PPP. If the exchange rate between the Rupee (India’s currency), and the U.S. dollar is 1, does absolute PPP hold in period t?

 

  1. 3 points. In year t+1, India becomes more productive at producing traded goods, so that productivity in the tradable sector becomes. What is the price of non-traded goods in India in year t+1?

 

QUESTION 7. Increasing Returns to Scale and Monopolistic Competition. 15 points. A country produces manufactured goods, whose industry is characterized by increasing returns to scale, monopolistic competition, and firms that differentiate their products.  Firms are symmetric: all firms have identical cost functions and demand functions given below.

where  is the quantity demanded when the total industry demand is , the number of firms in the industry is , the average price in the industry is  and the price charged by the firm is , is the total cost of producing   units, is the fixed cost of production, and  is the marginal cost of production. Assume that does not change with the price in the industry.

 

  1. a) 3 points. Derive an equation that relates average cost to , , , and .  That is, derive an equation with  on the left-hand side and , ,  and  on the other. Hint: firm symmetry implies that each firm charges the same price.

 

  1. b) 3 points. Derive an equation that relates marginal revenue to , and .  Hint: use demand to get P in terms of Q then multiply by Q to get total revenue.

 

  1. c) 1 point. To maximize profits, firms set marginal revenue equal to__________.

 

  1. d) 3 points. Given your answers to b) and c) derive an equation that relates to ,  and .

 

  1. e) 2 points. Sketch the equations from a. and d. below. Label the equilibrium number of firms and the equilibrium price .
  2. f) 3 points. Suppose the country opens to trade, which leads to a larger market size, . Show the effect of this on your graph from e., labeling the new price and the new number of firms .  Clearly label any curves that shift, and in which direction they shift.