MPE711 Global Trade and Markets

Assignment 2

Trimester 1 2023

Question 1

Please read the article "Trade Can Worsen Income Inequality" by Peter Dizikes of MIT New Office. The paper can be found following the assignment's questions.

The article mentions a study by Donaldson and his colleagues using Ecuador's data. What is the trade theory that best suits to analyse the impact of trade on income inequality?

Are the major findings by Donaldson and his colleagues in line with this trade theory?

What are the reasons that are mentioned in the article to explain the findings in the study by Donaldson and his colleagues?

Please be elaborate in your answers to the questions above.

Note that in their answers, students need to use the material that has been covered in MPE 711 Global Trade and Markets.

(10 marks)

Question 2

2.1.Assume that the world consists of only two countries: Australia and Indonesia. Australia's demand curve for A4copy paper and Australia's supply of A4copy paper are

D= 100-20P

S= -20+20P

Indonesia's demand curve for A4copy paper and Indonesia's supply of A4copy paper are:

D*=80-20P

$*=40+20P

where D, S, and P denote demand, supply, and the price in Australian dollars, respectively.

Please answer the following questions:

If Australia and Indonesia can freely trade with each other, please graphically show the trade patterns between them? Specifically, which country will be the exporter of A4 copy paper? What is the price of A4 copy paper in free trade? What is the volume of their bilateral trade?

1. marks)

2.2. Given the information in Question 3 assume now that Australia's government decides to impose a specific tariff of AU$ 1 on Australia's A4 copy paper imports from Indonesia. The government may ask domestic consumers who buy the imported A4 copy paper to pay the tariff. Alternatively, the Australian government may ask the Indonesian producers to pay the tariff if they sell A4 copy paper to Australian consumers.

Please graphically show that the effects of the tariff on the patterns of trade are the same no matter whether Australian A4 copy paper consumers or Indonesia's A4 copy paper producers have to pay the tariff.

Hint: Please determine and graph the effects of the tariff on the following: the price of A4 copy paper in each country, the quantity of A4 copy paper supplied and demanded in each country, and the volume of trade. Note that the tariff will influence Australia's import demand if Australian consumers of A4 copy paper have to pay the tariff. Alternatively, the tariff will influence Indonesia's export supply if Indonesian A4 copy paper producers have to pay the tariff.

(8 marks)

2.3. Determine the effects of the specific tariff on the welfare of Australia's producers, consumer, and the government.

(6 marks)

End of the Assignment's Questions

Trade can worsen income inequality

Using Ecuador as case study, economists show international trade widens the income gap in individual countries.

Peter Dizikes|MIT News Office

June 7, 2022

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