discuss three reasons why the extraction and export of natural resource exports may not lead to an increase in income per-capita of a country

SEQ CHAPTER \h \r 1International Economics Prof. Rivera-Batiz

BAU International University Spring 2018

Assignment #4

Please answer all of the sections of following four questions. Please provide explanations for your answers, including any calculations you have carried out. The problem set is due on April 18th (before class). Note that this problem set is to be answered individually, although small groups can work on it together. The answers must be submitted as a hard copy. Please provide comprehensive answers, showing where your results come from and supporting your answers with data and/or any references to academic studies.

1. Suppose that the market for tomatoes in a small Caribbean country called Banania, can be represented by the following demand and supply equations:

QD = 30 – 2P

QS = 15 + 3P

where QD represents the quantity demanded of tomatoes in Banania’s local market (measured in thousands of kilos of tomatoes) in a month, P represents the price of a kilo of tomatoes (in dollars, which is the local currency), and QS denotes the quantity supplied of tomatoes by domestic producers in Banania in a month (measured again in thousands of kilos of tomatoes).

(A) Suppose that Banania is closed to international trade and, therefore, there are no exports and imports. Please show diagrammatically the market equilibrium for tomatoes in the country. What would be the price of a kilo of tomatoes in Banania, assuming the market is in equilibrium? How much would be the quantity of tomatoes sold in the market each month? Provide a numerical answer as well as the diagrammatic answer and explain the numerical results.

(B) Suppose now that the government of Banania -influenced by proponents of globalization–decides to open all local markets to international trade. Assuming that the world market price of tomatoes is equal to $1 per kilo (and that transportation costs are close to zero), what would be the impact of the opening up of the economy to international trade on the price, output, and quantity consumed of tomatoes in Banania? Would Banania now export or import this product in world markets and by how much? Would you agree with the proponents of globalization that opening the economy to international trade benefits everybody? Please explain your answers.

(C) Influenced by the recent policies of President Donald Trump, the President of Banania changes his mind and decides to impose a tariff of $1 on the price of tomatoes imported into Banania. Assuming that the world market price of tomatoes is still equal to $2 per kilo, what would be the impact of the tariff on the price, output, and quantity consumed of tomatoes in Banania? Would Banania now export or import this product and by how much? How are consumers affected by the tariff? How are producers affected. Explain.

  1. In one of your required readings, the economist Shang-Jin Wei, asks the question: Is Globalization Good for the Poor in China?”. What is the answer provided by Wei and what evidence does he provide to support his conclusion? Professor Wei’s paper was written in 2002, would you still say today that “Globalization is good for the poor in China?” Please provide any evidence on this.

  2. Economists have for a long time been skeptical of the view that the discovery and export of natural resource products accelerates the economic growth of a country. In fact, some argue that natural resources are a “curse” for the economy. Why? Please discuss three reasons why the extraction and export of natural resource exports may not lead to an increase in income per-capita of a country, including how the Mundell-Fleming model would explains it. Provide any research or studies supporting your three explanations.