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Exercise 1
Read the article by R. Vernon, 1966, International Investment and International Trade in the Product Cycle Quarterly Journal of Economics, Vol. 80, No. 2 (May, 1966), pp. 190-207. Answer the following questions. Justify your answers
a) What is the Leontief paradox

b) Is Leontief statistical methodology of testing The Hecksher- Ohlin model appropriate
c) How Does Vernon explain the paradox using his idea of product cycle theory of International trade
d) The United States used to be a net exporter of automobiles and computers. They are now a net importer. How does Vernon product cycle theory explain this change in the commodity trade balance of the United States

Exercise 2
Use the Rybczynski theorem, offer curves, and production possibility frontiers to answer the following questions
a) Is the reduction of the population growth rate and increase in physical capital in emerging economies such as South Korea and china or free trade responsible for an improvement in standards of living of the workers in the newly industrialized countries and developed countries
b) Is it free trade or the reduction of the population growth rate and increase in physical capital in emerging economies that is responsible for the increase in income inequality in the developed countries

Exercise 3:
You have been asked to quantify the welfare effects of the US sugar duty. The following table gives the estimates of the US consumption and production of sugar under the current duty and after the removal of the duty.
Situation with import tariff Situation with zero import tariff
Wold price of sugar $0.15 per pound $0.15 per pound
Tariff (duty) $0.05 per pound 0
US consumption in billions of pounds per year 30 25
US production in billions of pounds per year 20 10
a) Estimate the consumer s gain or loss from removing the tariff
b) Estimate the producers gain or loss from removing the tariff
c) Estimate the net effect of the US national well being
d) Discuss the effect of the removal of the tariff on the income distribution in the US between the farm sector and the US relatively abundant factor of production
e) Read case study 9-1 the effect of the US quota on sugar imports. Was it better to replace the tariff by a quota equal to 10 billion pounds of sugar


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