While you are permitted to work together as a group, you must write out the answers on;your own (preferably in a separate room) without any help from those in the group.;Problem sets with similar answers in any question will receive a grade of zero.;I have not received any help and I have not provided help to other students in;writing up the answers to this problem set.;Signature;Unless your handwriting is clear and impeccable, you must turn in typed answers to the;problem sets. Hard copies of your answers will be handed in the beginning of class on;Tuesday, Nov 18. No late problem sets will be accepted.;1. The following table provides data on the Labor hours per unit of production of two goods;cell phones and TVs in the two countries, U.S. and Brazil.;Country;TV;U.S.;5;12;Opportunity cost of;producing one TV;10;Brazil;a.;Cell Phones;12;Complete the last column of the table above.;b.;Compared to Brazil, the US is more efficient in producing both goods. Why does;it still benefit the U.S. to trade with Brazil?;c.;Pick a feasible terms of trade and show and explain how the U.S. can benefit;from trading with Brazil at the chosen terms of trade.;2. In the late 1980s, Vietnam went from an essentially closed economy to one that is highly;integrated with the world economy in terms of trade in goods and services. Since 1990, the;growth in GDP per capita in Vietnam has been exceptional reaching double digits. Use the;following simplifying assumptions to answer questions a) to c);Vietnam produces two goods: rice (labor intensive) and computers (capital intensive).;Vietnam is relatively labor abundant, and the domestic price of rice relative to price of;computers is lower than that in the world market.;Resources used in production can move across sectors when economic conditions;change.;a.;Which good does Vietnam export? Which good does it import?;b.;Using the tools discussed in class, show graphically the change in overall welfare in;Vietnam from liberalizing its trade policy. Your graph should use a two-good;framework with the good that Vietnam exports on the x-axis and its importable good on;the y-axis.;c.;Who are the winners and losers in Vietnam from this change in trade policy?;3.;In China, three members of a family own a small business. They can hire up to two more;people to work in their business. Each worker is paid $300. The total output per year;depends on the number of members working in the business that year. Total annual income;(or value of output) is represented by the following chart.;Number working;on firm;1;2;3;4;5;Total Business Output (in $);MPL;900;1700;2300;2700;2900;900;800;600;400;200;Each member of the family has the opportunity to migrate to the nearest city where there are;two different types of jobs. Informal jobs are available to everybody and pay $200. Formal;sector jobs are more difficult to get and pay $800. The probability of finding a job in the;formal sector is 60%. For questions A-C, suppose that there are no costs of migration.;a. Suppose all three members of a family were to work in the business. How many;workers should the family hire to maximize business Profit? Show your work.;b.;What is the expected wage in the city? Show your work.;c.;Show that the business maximizes total family income by sending two of their family;members into the city, letting one stay on the farm and hiring two workers.;4.;Consider a country with production function, savings rate, and capital depreciation rate.;a. What is the level of capital per worker () and output per worker () when the country is;closed to capital flows? (Hint: Solow model);b.;What is the level of and when the county becomes perfectly open to capital flows?;Assume the world rental rate of capital is. Show your derivations. (Hint: free-capitalflow model we discussed in class, Weil Ch.11);c.;Use your answers to a) and b), explain why higher savings rates are associated with;higher levels of GDP in a closed economy, but they are not in an open economy.;d.;Does the statement in c) mean that if you save a lot, you are better off in a closed;economy? Why or why not?;5.;Read the following article on immigration and answer the following questions;a. Explain the term brain drain? Why is it an issue to the policymakers in poor;countries?;b.;Explain the term brain gain? What is the key aspect that turns brain drain into;brain gain?;c.;Besides direct remittance (sending income back to home country), name two other;sources of potential gains to the sending country from skilled emigration.;Drain or gain? Poor countries can end up benefiting when their brightest citizens;emigrate;Economics focus | May 26th 2011 | from the print edition;WHEN people in rich countries worry about migration, they tend to think of low-paid incomers;who compete for jobs as construction workers, dishwashers or farmhands. When people in;developing countries worry about migration, they are usually concerned at the prospect of their;best and brightest decamping to Silicon Valley or to hospitals and universities in the developed;world. These are the kind of workers that countries like Britain, Canada and Australia try to;attract by using immigration rules that privilege college graduates.;Lots of studies have found that well-educated people from developing countries are particularly;likely to emigrate. By some estimates, two-thirds of highly educated Cape Verdeans live outside;the country. A big survey of Indian households carried out in 2004 asked about family members;who had moved abroad. It found that nearly 40% of emigrants had more than a high-school;education, compared with around 3.3% of all Indians over the age of 25. This brain drain has;long bothered policymakers in poor countries. They fear that it hurts their economies, depriving;them of much-needed skilled workers who could have taught at their universities, worked in their;hospitals and come up with clever new products for their factories to make.;Many now take issue with this view (see article). Several economists reckon that the brain-drain;hypothesis fails to account for the effects of remittances, for the beneficial effects of returning;migrants, and for the possibility that being able to migrate to greener pastures induces people to;get more education. Some argue that once these factors are taken into account, an exodus of;highly skilled people could turn out to be a net benefit to the countries they leave. Recent studies;of migration from countries as far apart as Ghana, Fiji, India and Romania have found support for;this brain gain idea.;The most obvious way in which migrants repay their homelands is through remittances. Workers;from developing countries remitted a total of $325 billion in 2010, according to the World Bank.;In Lebanon, Lesotho, Nepal, Tajikistan and a few other places, remittances are more than 20% of;GDP. A skilled migrant may earn several multiples of what his income would have been had he;stayed at home. A study of Romanian migrants to America found that the average emigrant earned;almost $12,000 a year more in America than he would have done in his native land, a huge;premium for someone from a country where income per person is around $7,500 (at market;exchange rates).;It is true that many skilled migrants have been educated and trained partly at the expense of their;(often cash-strapped) governments. Some argue that poor countries should therefore rethink how;much they spend on higher education. Indians, for example, often debate whether their;government should continue to subsidise the Indian Institutes of Technology (IITs), its elite;engineering schools, when large numbers of IIT graduates end up in Silicon Valley or on Wall;Street. But a new study of remittances sent home by Ghanaian migrants suggests that on average;they transfer enough over their working lives to cover the amount spent on educating them;several times over. The study finds that once remittances are taken into account, the cost of;education would have to be 5.6 times the official figure to make it a losing proposition for Ghana.;There are more subtle ways in which the departure of some skilled people may aid poorer;countries. Some emigrants would have been jobless had they stayed. Studies have found that;unemployment rates among young people with college degrees in countries like Morocco and;Tunisia are several multiples of those among the poorly educated, perhaps because graduates are;more demanding. Migration may lead to a more productive pairing of peoples skills and jobs.;Some of the benefits of this improved match then flow back to the migrants home country, most;directly via remittances.;The possibility of emigration may even have beneficial effects on those who choose to stay, by;giving people in poor countries an incentive to invest in education. A study of Cape Verdeans;finds that an increase of ten percentage points in young peoples perceived probability of;emigrating raises the probability of their completing secondary school by around eight points.;Another study looks at Fiji. A series of coups beginning in 1987 was seen by Fijians of Indian;origin as permanently harming their prospects in the country by limiting their share of;government jobs and political power. This set off a wave of emigration. Yet young Indians in Fiji;became more likely to go to university even as the outlook at home dimmed, in part because;Australia, Canada and New Zealand, three of the top destinations for Fijians, put more emphasis;on attracting skilled migrants. Since some of those who got more education ended up staying, the;skill levels of the resident Fijian population soared.;Passport to riches;Migrants can also affect their home country directly. In a recent book about the Indian diaspora;Devesh Kapur of the University of Pennsylvania argues that Indians in Silicon Valley helped;shape the regulatory structure for Indias home-grown venture-capital industry. He also argues;that these people helped Indian software companies break into the American market by vouching;for their quality. Finally, migrants may return home, often with skills that would have been hard;to pick up had they never gone abroad. The study of Romanian migrants found that returnees;earned an average of 12-14% more than similar people who had stayed at home. Letting educated;people go where they want looks like the brainy option.
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