Fall2014 Econ471-The following table provides data on the Labor hours per unit of production of two goods
Question;Fall2014;Econ 471;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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