1.Assume that both Paraguay and Poland are unskilled-labour abundant countries. Based on your findings in Question 1, explain in up to 200 words whether your data agree or disagree with the Stolper-Sa

International trade – Assignment 2

1. Using data that you obtained for Assignment 1 for Paraguay and Poland, calculate the correlation coefficient (using CORREL command in excel) between Openness and the GINI Index for each nation. Report and interpret this relationship in up to 200 words. [Hint: the GINI is often used as a proxy for the ratio of skilled to unskilled wages in empirical studies]. (5 marks) 


Correlation coefficient of Paraguay = -0.291865

Correlation coefficient of Poland = -0.60028

Trade openness is a measure of economic policies that either promote or restrict trade between countries. Openness is the degree of integration of the domestic economy to the world economy. The GINI index is used represent the income or wealth distribution of a nation's residents and is the most commonly used to measure income inequality.

Trade openness and the GINI index have a negative relationship in both Paraguay and Poland. A negative correlation coefficient in this case means that an increase(decrease) in Openness is associated with a decrease(increase) in the GINI index of a country or a decrease(increase) in income inequality. The closer the correlation coefficient is to -1 the more desirable a country is, as higher levels of trade openness mean there is less income inequality present. Paraguay’s correlation coefficient is -0.2918655 which indicates that the relationship between openness and the GINI index is negative but very weak. However, Poland’s correlation coefficient is -0.60028 which is much stronger as a correlation coefficient of -1 being ideal and perfect correlation. This means Poland is closer to being a very desirable country.

You can also look at the GINI index for both nations, Paraguay’s average GINI index is 52.2 and Poland’s average GINI index is 33.5. The GINI index is used as a measure of inequality, it is between 0 and 100. The value 0 indicates perfect income equality whereas the value 100 indicates perfect income inequality. Therefore, Poland is closer to income equality when compared to Paraguay.

Some factors that may impact a countries relationship between income inequality and openness is technology, competition and trade dependence. Technology enables countries to increase their levels of employment as it increases their ability to trade with other developed nations, this also impacts the wages received as it increases the skill set of workers. Another factor is trade dependence, as countries who share borders with other countries may have higher levels of trade openness as they can easily import and export, this enables them to maximise the use of their resources and intern would have an impact on the purchasing power of a nation and thus their ability to decrease levels of income inequality.

1. Using a graph (from your lecture slides) for substitutable inputs case, explain in up to 200 words the Stolper-Samuelson theorem. (5 marks) 


The Stolper-Samuelson theory states that an increase in the relative price of a good will cause an increase in the real earnings of the material used intensively in the production of that good and will decrease the real earnings of the other material.

According to the Stolper-Samuelson theory, in both Poland and Paraguay, the scarce factors’ income falls when trade openness increases in terms of both goods and the abundant factors income rises in terms of both goods.

The table above shows the equilibrium of real wages between China and the USA. In which China uses an unskilled workforce that makes apparel and the USA uses a skilled workforce that makes plastic. Here we can observe that over a period of time plastic made by the USA drops in value and apparel made by China increases. As the value of plastics which is a skill intensive product, rises in relation to apparel which is an unskilled intensive product, we can say that the income of the skilled workers increases in relation to this scenario, and thus as a result the wage gap in the USA increases.

This is shown in the last equilibrium as the apparel curve shifts inwards and the last intersection with plastic curve suggests a greater wS/Pp and a decrease in wU/Pp. This is as a result of the Stolper-Samuelson theory, which explains that a rise in the relative price of a good will lead to a rise in the real earnings of the material used and will decrease real earnings of the other material.

1. Assume that both Paraguay and Poland are unskilled-labour abundant countries. Based on your findings in Question 1, explain in up to 200 words whether your data agree or disagree with the Stolper-Samuelson theorem. (5 marks) 


2. Consider the Ricardian model given in Question 3 of Assignment 1.

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


   • (b)  Derive the world relative supply curve of Radios (put the relative price of Radios on the vertical axis and the relative quantity of Radios supplied on the horizontal axis). (2 marks) 


   • (c)  PutinthesamefiguretherelativedemandcurveforRadiosthatyoufoundin part (a) and the world relative supply curve of Radios that you found in part (b). Determine the equilibrium relative price of Radios and the equilibrium relative quantity of Radios under free trade. (2 marks) 


   • (d)  Under free trade, which country produces which good(s)? How many units? (2 marks) 


(e)  Who gains from trade? Who loses from trade? State labours’ stance towards free trade in each country. (2 marks) 
 Who gains from trade?

The economic agents are the ones who gain from trade through the net profits and this is from allowance to voluntary exchange their goods with each other.

Who loses from trade?

It is still the same economic agents that do fail or lose in trade and this is when their businesses tend to record a significant net loss due to a variety of factors such as increase wholesale prices of products, high taxations from the government, seasonal changes of the demands of their products.

The states labour make up with various policies to help maintain the trade standards of each and every trader in all the countries in the world. They came up with trade standards which will spell out very well the traders rights and their various limits of trade.