Discussion 1Discussion 2Discussiodiscussion4Discus

Consider two countries Pakistan and USA trading with each other, with Pakistan exporting garments to USA and USA exporting aircrafts to Pakistan. Use the Standard Trade Model to illustrate the gains from trade between USA and Pakistan, assuming that USA has an abundant supply of capital relative to Pakistan and Pakistan is rich in labor resources. Assume also that consumer preferences for both goods (garments and aircrafts) are similar in the two countries and trade is costless.

Explain clearly the analogy between international borrowing and lending and ordinary international trade.

Provide two examples of products that are traded on international markets for which there are dynamic increasing returns. In each of your examples, show how innovation and learning-by-doing are important to the dynamic increasing returns in the industry.

For each of the following examples, explain whether it is a case of external or internal economies of scale:

1. A number of firms doing contract research for the drug industry are concentrated in southeastern South Carolina.

2. All Hondas produced in the United States come from plants in Ohio, Indiana or Alabama.

3. All airframes for Airbus, Europe’s only producer of large aircraft, are assembled in Toulouse, France.

4. Cranbury, New Jersey, is the artificial flavor capital of the United States.

In perfect competition, firms set price equal to marginal cost. Why can’t firms do this when there are internal economies of scale?

Which of the following are direct foreign investments?

1. A Saudi businessman buys $10 million of IBM stock.

2. The same businessman buys a New York apartment building.

3. A French company merges with an American company, stockholders in the U.S. company exchange their stock for shares in the French firm.

4. An Italian firm builds a plant in Russia and manages the plant as a contractor to the Russian government.

If tariffs, quotas and subsidies each cause net welfare losses, why are they so common, especially in agriculture, among the industrialized countries such as the United States and the members of the European Union?

Give an intuitive explanation for the optimal tariff argument.

What are some of the reasons for the decline in the import substituting industrialization strategy in favor of a strategy that promotes open trade?

What are the key assumptions that allow strategic trade policy to work in the Brander-Spencer example of Airbus and Boeing?