12th exercise list
1)Consider the table below, describing the production process of the agricultural sector of country X, which currently employs 20 workers.
Workers / 0 / 5 / 10 / 15 / 20 / 25Output (in dollars) / 0 / 250 / 500 / 1000 / 1000 / 1000
Using this information, answer the following questions:
a)How many workers are disguisedly unemployed?
b)If we assume disguised workers are reallocated to other sectors, and the remaining workers are compensated by their average productivity (output per worker), how much is each worker’s wage (those remained in the original sector)?
c)How much should the government pay to those reallocated workers in order to give them incentive to leave?
2)Explain Raul Prebisch’s argument that the terms of trade of the less developed countries were declining.
3)Explain what does Prebisch’s argument implies for the north/south trade.
4)Somebody argues that government should reallocate disguised unemployment in agricultural sector to construct infrastructure. Which kinds of problems can be brought up?
5)If we look at the trade patterns in the 19th century, north specialized in industrial goods, and the south in primary goods. What’s the reason? Think what ECLA thesis implies about free trade.
6)If country A specializes in the production of oil and imports consumption goods, what is country A’ terms of trade?
7)What is not correct as an explanation of the theory of disguised unemployment?
①The marginal product of labor for disguisedly unemployed workers is zero.
②The disguised workers must be reallocated from the rural agricultural sector to the sector of constructing infrastructure such as dams, roads or irrigations.
③In order to make this policy successful, the total output curve of rural agricultural sector must shift upward in the long run.
④It is easy to identify disguisedly unemployed workers who must be reallocated among total workers in rural sector.
⑤It is difficult to disguisedly unemployed workers to learn new job skill in sector of constructing infrastructure.
8)What is the not right explanation regarding free-trade vs. protectionism?
①Import substitution industrialization is against protectionism and in favor of enlargement of free-trade.
②In order to protect domestic industry, many countries take action against dumping which means exporting product below production cost or below the price charged in its home market
③Raul Prebisch insists that specializing in only one product based on the free trade theory caused the decline in terms of trade of periphery.
④The comparative advantage theory supports free trade and international division of labor.
⑤According to the trade barrier argument, domestic infant industry must be protected.
9)Which of the following policies is not advocated by Import Substitution Industrialization (ISI) theorist?
A) Tariffs on the imported goods
B) State enterprises
C) Development banks
D) Free trade zone
10)Which of the following is not a possible issue involved in the reallocation policy of the disguised unemployed?
A) There may be no way to figure out which workers to reallocate?
B) Workers may not be willing to accept this proposal ifthey receive only the same as before.
C) It may be hard for the disguised unemployed to learn the skills for the new job?
D) The workers who are not reallocated may also have incentives to ask for reallocation.
Answer key:
1)a) 5 workers are disguised (20 – 15). Notice that the agricultural sector employs only 20 workers.
b) 1000/15 = 66.66
c) Government should pay them at least 1000/20=50, which is their wage if they keep their old jobs. Otherwise these workers would choose to remain in their original sector.
2)Prebisch argued (using Engel’s Law) that there was an increase in supply of agricultural commodities (exported by less developed countries) greater than the increase in demand. Also, due to technological progress and synthetics, there was only a small increase in the demand for raw products. Meanwhile, according to Prebisch, monopoly power of firms in developed countries and their unions prevented the prices of industrializedgoods (imported by less developed countries)from dropping.
3)Prebisch’s argument implies that the south countries don’t benefit from the trade. The terms of trade is decreasing for these countries, which means these countries have to export more in order to get the same amount of import goods over time. Therefore, southern countries become poorer over time.
4)How to figure out which workers to reallocate?, Are the workers willing to accept this proposal if they receive only the same as before and not more?, Is it possible for the disguised unemployed to learn the new work skill in a short time?
5)Trade patterns in the 19th century was according to comparative advantage under free trade. ECLA thesis points out a problem posed by free trade (or comparative advantage).
6)A country’s terms of trade (TOT) is the relative price of a country’s exports in terms of imports ().
Country A’s T0T represents the price of oil in terms of food. Thus, TOT indicates the amount of food that country A can buy from the sale of one barrel of oil.
7)④It is never easy to identify disguisedly unemployed workers who must be reallocated among total workers. This is the problem of this model.
8)①Import substitution industrialization is in favor of protectionism through tariffs and exchange rate control and against free-trade.
9)D
10)D