Question;Fall 2014 Econ;471 Prof. Bee-Yan Roberts;Problem Set #4;COVER PAGE TO PROBLEM SET #4;Printed Name;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 onTuesday;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;Cell Phones;TV;Opportunity cost of producing one TV;U.S.;5;10;Brazil;12;12;a. 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);l;Vietnam produces;two goods: rice (labor intensive) and;computers (capital intensive).;l;Vietnam is;relatively labor abundant, and the domestic price of rice relative to price of computers;is lower than that in the world market.;l;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;Total Business Output (in $);MPL;1;900;900;2;1700;800;3;2300;600;4;2700;400;5;2900;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-capital-flow 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 people?s skills and jobs.;Some of the benefits of this improved match then flow back to the migrant?s;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 people?s 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 India?s 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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