INTERNATIONAL TRADE ASSIGNMENT 2

SEMESTER 1, 2020

I. INTRODUCTION

Assume that you are an economic consultant hired by an international organization/government to provide your expert advice on conditions pertaining to international trade in Argentina and El Salvador. Your analysis will consist of two separate reports (one for Assignment 1 and the other for Assignment 2). As an expert, your job is two-fold:

1. You are required to analyse any relevant issue using your technical skills. This involves utilizing your knowledge in international trade models as well as inspecting and interpreting data.

2. You need to communicate your results in an effective way.

The purpose of this exercise is to assess your aptitudes in each domain. You will evaluate the trading conditions in these countries (Argentina and El Salvador) based on the scenarios detailed in each question in this Assignment. Your analysis will form the basis for a short report to the international organization/government body— summarising your recommendations and the associated rationale.

II. DATA SOURCE

For your data analysis, you first need to obtain data from the World Bank (see the link below) and follow the steps described below. Notice that World Bank regularly updates its database; therefore it is crucial to obtain all data as soon as possible. The data range is from 1998 to 2014.

You need to obtain the country-level data for Argentina and El Salvador on:

i. Imports of goods and services (in current US$)

ii. Exports of goods and services (in current US$)

iii. GDP (in current US$)

iv. GDP per capita (in current US$)

v. GINI Index (World Bank estimate) from the World Bank’s World

Development Indicators:

(http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators).

[Note that if your browser (such as Chrome) does not open the web page; try a different browser (such as Internet Explorer)]

Please DO NOT attach Excel files to the brief. The policy brief needs to be precise and short. Avoid unnecessary jargon. Your policy brief cannot exceed two pages.

III. REQUIRED TASKS

Your tasks involve two dimensions. First, you need to analyse the data (see Steps 1, 2 and 3 in the next section). Second, you also need to perform a technical analysis by considering a hypothetical trading environment based on Ricardian model (see Step 4 in the next section).

Accordingly, you are required to:

· Provide a visual representation of the relationship between openness and inequality by plotting a graph (use scatter plot) that shows the change in openness with respect to GINI index for these countries over the period between 1998 and 2014 (including all years, i.e., 1998, 1999, …, 2014).

· Establish how being integrated with the rest of the world affected inequality in these two countries by looking at the correlation between their openness and GINI index.

· State and explain whether your data findings are in line with theory (Assume both Argentina and El Salvador are unskilled-labour abundant countries).

· Continue your technical analysis from your first report and state what would have happened to these countries once they are allowed to trade with each other based on our hypothetical scenario of Ricardian model.

IV. REQUIRED STEPS TO COMPLETE EACH TASK

DATA ANALYSIS

For data analysis, you need to follow Steps 1, 2 and 3 given below.

Step 1. Using data you obtained for Argentina and El Salvador, plot openness (as a percentage) against GINI index for each nation. Use two graphs, one for each country (as a chart type: you are required to use scatter plot). You need to use your openness calculations from Step 1 of Assignment 1). Put openness (as a percentage) on the vertical axis and GINI index on the horizontal axis.

Step 2. Using data you obtained for Argentina and El Salvador, calculate the correlation coefficient (using CORREL command in excel) between Openness and the GINI Index for each nation.1 Report and interpret this relationship in up to 200 words and state for which country this relationship is stronger. [Hint:

1 The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. A Lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual. Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality. The Gini index provides a convenient summary measure of the degree of inequality.

the GINI is often used as a proxy for the ratio of skilled to unskilled wages in empirical studies].

Step 3. Assume that both Argentina and El Salvador are unskilled-labour abundant. First define, Stolper-Samuelson theorem and then check whether your data findings are in line with the Stolper-Samuelson theorem. Explain your answer up to 200 words.

TECHNICAL ANALYSIS

For technical analysis, you need to follow Step 4.

Step 4. In order to conjecture the circumstances in these two countries under autarky (when there is no trade), consider the following hypothetical scenario based on Ricardian model. Assume throughout that those two countries (Argentina and El Salvador) are the only two countries in the world, at least for purposes of trade. There are two goods: Hammers and Widgets. Consumers in both countries always spend half of their income on Hammers and half of their income on Widgets. The only factor of production is labour. Each Argentinian worker can produce 4 Hammers or 2 Widget per unit of time. Each El Salvadoran worker can produce 2 Hammers or 2 Widgets per unit of time. There are 50 workers in Argentina and 75 workers in El Salvador. You need to provide conditions in each country by stating:

a) Derive the relative demand curve relating the relative demand for Widgets to the relative price of Widgets. Do this algebraically, and then show what the curve looks like in a diagram (put the relative price of Widgets on the vertical axis and the relative quantity of Widgets demanded on the horizontal axis).

b) Derive the world relative supply curve of Widgets (put the relative price of Widgets on the vertical axis and the relative quantity of Widgets supplied on the horizontal axis).

c) Put in the same figure the relative demand curve for Widgets that you found in part (a) and the world relative supply curve of Widgets that you found in part (b). Determine the equilibrium relative price of Widgets and the equilibrium relative quantity of Widgets under free trade.

d) Under free trade, which country produces which good(s)? How many units?

e) Who gains from trade? Who loses from trade? State workers’ stance towards free trade in each country, i.e., do they support or oppose free trade?

V. PRESENTATION OF RESULTS

You need to provide a brief in order to effectively communicate your findings. In your brief, you must have the following ingredients:

· Headline: One possible example is: “A Simple Analysis of Openness for

Argentina and El Salvador: Part II”

· Data Analysis: In this section, you need to present your data analysis based on your findings in Steps 1, 2 and 3.

· Technical Analysis: In this section, you need to communicate your technical results based on your findings in Step 4.