Jahan Sherwani (24330). Assignment 1.

Q1) Increased trade between the Netherlands, a high-wage country, and Pakistan, a
low-wage country, sparks concerns about potential wage and industry effects.
However, suggesting that Dutch industries would completely relocate and Dutch
wages would plummet to Pakistani levels oversimplifies the complexities of
international trade dynamics. Several factors contribute to the outcomes.

One key factor is comparative advantage, where each country specializes in areas
where it has a relative efficiency advantage. Dutch industries are likely to focus on
sectors where they excel, potentially leading to wage growth in those areas,
particularly those requiring advanced technology and a skilled workforce. Factor
mobility, such as the ability of labor and capital to adapt within a country, also plays a
significant role. If Dutch workers can transition to other industries or if capital can be
redirected effectively, wage reductions may not be as severe as suggested.

Global value chains are another critical aspect, where industries integrate into
international production networks, potentially preserving jobs and economic activity
while benefiting from trade. Institutional factors, including labor laws and minimum
wage regulations, also shape wage levels. Therefore, while trade expansion can
impact wages and industries, the actual outcome is complex and depends on various
factors, including how countries leverage their comparative advantages, manage
factor mobility, integrate into global production networks, and shape labor market
policies.

Q2) Since being granted GSP Plus status by the European Union (EU) in 2014,
Pakistan has experienced a notable uptick in exports to the EU. This special
designation allows Pakistan to export a wide array of products to the EU with
favorable tariff rates, enhancing their competitiveness in the European market. As a
result, certain businesses have gained a competitive advantage in the EU market,
leading to an increase in exports. Moreover, Pakistan has expanded its exports of
seafood, minerals, and chemicals to the EU under this arrangement.
Overall, the GSP Plus status has bolstered trade between Pakistan and the EU,
facilitating increased exports for Pakistan while affording the EU a broader range of
imported goods at preferential tariff rates. In 2018, Pakistan availed tariff concessions
on exports worth 5.885 billion euro out of the total export of 6.739bn euros to EU
member states.

Key sectors like textiles, garments, bed linen, terry towels, hosiery, leather, sports
goods, and surgical instruments have witnessed significant growth in exports to the
EU since acquiring GSP Plus status. This is evident in the fact that EU imports of
these Pakistani goods amounted to €4.7 billion in 2021, accounting for almost 71% of
the total exports benefiting from GSP Plus [Monitoring Missions and Priorities in
Pakistan, GSP Hub].

Q3) In the last five decades, advanced nations have experienced a significant shift in
their economic landscapes. Traditionally reliant on natural resources for growth, these
countries have transitioned towards emphasizing technology, services, and
knowledge-based industries. This transformation underscores a strategic focus on
human capital and innovation as key drivers of economic competitiveness, marking a
departure from resource-heavy sectors.

Conversely, many developing nations have maintained a dependence on natural

resources, albeit with a growing recognition of the need to invest in human capital,
education, and technology. Efforts are underway in these countries to diversify their
economies away from resource dependency, acknowledging the pivotal role of human
resources, particularly skilled labor, in this transition.

In the past fifteen years, Pakistan's export structure has exhibited limited
diversification, with textiles, agriculture, and select manufacturing industries
dominating its export portfolio. Despite attempts to broaden its export base, progress
in diversification has been modest compared to peers. In contrast, Vietnam has made
remarkable strides in diversifying its exports over the same period. By expanding its
manufacturing sector, particularly in electronics and textiles, and actively
participating in global supply chains, Vietnam has demonstrated resilience and
adaptability to meet evolving market demands. This success underscores Vietnam's
ability to seize opportunities in the export sector and reflects a more proactive
approach to economic development.

Q4) Tij = A [(Yi×Yj)/Dij]

In the context of Pakistan's trade relations, the gravity equation implies that its
commerce with India should be significant, given their close geographical proximity
and substantial economic sizes. With a lengthy shared border and deep cultural and
historical connections, the model predicts a high volume of trade between Pakistan
and India.

Conversely, trade between Pakistan and the United States is expected to be

comparatively smaller due to the greater distance between them, disparities in
economic magnitude, and variations in trade policies. These factors are anticipated to
constrain the volume of trade between the two countries.

Although efforts have been made to enhance economic ties between Pakistan and
India through trade agreements, historical tensions and regulatory barriers have
hindered progress. Similarly, Pakistan's trade relationship with the United States has
been influenced by geopolitical factors and economic interactions. Despite being a
significant trading partner for Pakistan, trade volumes with the United States have
experienced fluctuations due to evolving policies and geopolitical dynamics.

While the gravity equation offers valuable insights into trade predictions, it's crucial
to acknowledge the complexities of real-world trade dynamics. Geopolitical tensions,
regulatory environments, trade policies, and global economic conditions collectively
shape trade interactions, rendering them more intricate than simplified models
suggest. Therefore, while the gravity equation provides a foundational framework for
understanding trade patterns, real-world trade dynamics are influenced by a broader
array of factors.
Q5) a) China possesses an absolute advantage in cloth production, being able to
manufacture 20 units per unit of labor compared to Pakistan's 10 units. Similarly,
China holds the absolute advantage in wheat production, yielding 30 units per unit of
labor compared to Pakistan's 10 units.

b) Comparative advantage is determined by analyzing the opportunity costs of

producing one good relative to another in each country. China's comparative
advantage lies in wheat production as it can produce 30 units of wheat while
sacrificing only 20 units of cloth. Conversely, Pakistan's comparative advantage rests
in cloth production as it can produce 10 units of cloth while sacrificing only 10 units
of wheat.

c) Through trade, Pakistan and China can capitalize on their respective comparative
advantages. Pakistan, specializing in cloth production, can trade with China, which
specializes in wheat production. This exchange allows both countries to increase
overall production and consumption of cloth and wheat. By focusing on producing
goods in which they have a comparative advantage, trade enhances economic
efficiency, enabling both countries to consume more of both goods than they could
produce individually. Ultimately, trade facilitates mutual benefits for Pakistan and
China, leading to increased prosperity and welfare for both nations.

Q6) a) The maximum production capacity in the Home country is: Mobile phones:
3000 / 30 = 100 phones Towels: 3000 / 5 = 600 towels The maximum production
capacity in the Foreign country is: Mobile phones: 3000 / 50 = 60 phones Towels:
3000 / 15 = 200 towels

b) The opportunity cost of producing 1 Mobile Phone in the Home country is 5

Towels (5 / 30), and the opportunity cost of producing 1 Towel is 1/5 of a Mobile
Phone. The opportunity cost of producing 1 Mobile Phone in the Foreign country is
3.33 Towels (15 / 50), and the opportunity cost of producing 1 Towel is 3/10 of a
Mobile Phone. Based on these opportunity costs, the Home country should specialize
in producing towels, while the Foreign country should specialize in producing mobile
phones.
c) The Home country should specialize in producing towels if the relative price of
towels in terms of mobile phones is greater than 1/5. The Foreign country should
specialize in producing mobile phones if the relative price of mobile phones (in terms
of towels) is higher than 3/10.

d) The Home country's maximum production of mobile phones is 100. If the relative
price of mobile phones exceeds 1 (the price of mobile phones in terms of towels), the
Home country will produce mobile phones beyond its maximum capacity.

Q7) It’s essential to recognize that while trade may have negative implications for
specific groups of workers, it also yields benefits for others. Consumers benefit from
lower prices on imported goods, driven down by international competition.

Additionally, workers in industries that can effectively compete globally may

experience increased incomes due to heightened demand for their products and
services. In the context of perfect labor mobility between countries, the impact on real
wages becomes more apparent. Perfect labor mobility implies that workers can easily
transition between industries and locations within and across countries.

Under these conditions, real wages tend to equalize based on relative productivity
levels across different industries. For example, if Germany has higher real wage rates
than Pakistan due to greater productivity, international trade is likely to affect real
wages as follows: Lower-wage countries like Pakistan may become more competitive
in industries where they possess a comparative advantage. This could lead to a decline
in their relative wages but an increase in employment opportunities as industries
become more cost-effective. Higher-wage countries like Germany may maintain
competitiveness in industries where they excel due to their higher productivity levels.
Consequently, their real wages may remain relatively high.

In conclusion, under perfect labor mobility, trade serves to equalize real wages
between countries by aligning them with productivity levels across various industries.
Lower-wage countries may enhance competitiveness, while higher-wage countries
can sustain their advantage in industries where they excel. This process fosters a more
efficient allocation of resources and contributes to an overall improvement in global
welfare.

Q8) a)

b)
c) Japan's ample resource availability suggests that an increase in capital will lead to a
more favorable expansion of its production possibilities frontier (PPF), particularly
for export-oriented goods. Consequently, Japan is likely to export Good 1, benefiting
from greater access to funds for its production. This would result in a rise in the cost
of producing Good 1 in Japan but a decrease in China. Conversely, Japan would
import Good 2 from China, leading to a higher cost of Good 2 in China but a lower
cost in Japan.

d) In the trade relationship between China and Japan, China specializes in producing
Good 2, while Japan focuses on Good 1. Land and labor resource owners in China
benefit from this specialization, while capital and labor resource owners in Japan
profit. However, it's important to note that under current conditions, landowners and
capital owners in both China and Japan may experience losses.

Q9) The marginal product of labour multiplied by the output price yields the
equilibrium pay rate in a scenario where a nation produces both cotton and tea. Let's
now examine a scenario in which the price of tea stays the same but the price of
cotton rises by 20%. We are able to Analyse the impact on the equilibrium wage rate,
cotton, and tea labour demand. Workers from the tea industry move to the cotton
industry as a result of rising cotton prices, which make it more profitable to grow
cotton. The overall output of cotton rises as a result of this change in manpower. But
when manpower shifts away from the tea industry, less tea is produced.

The equilibrium wage rate in the cotton sector tends to increase as demand for labor
rises alongside higher cotton prices. However, this increase in wages may not directly
correspond to the price hike in cotton. It's crucial to recognize that economies
typically operate along their production possibility frontier (PPF), which delineates
the maximum combination of goods a country can produce given its resources and
technology. The slope of the PPF signifies the trade-off between producing different
goods. When the relative price of cotton increases compared to tea, the economy
adjusts by moving down and to the right along the PPF. This implies a higher output
of cotton and a lower output of tea.
Q10) China possesses a distinct comparative advantage in the realm of barley
production, as evidenced by its ability to yield 15 units of barley per hour's worth of
labor. In contrast, Pakistan's production stands at a comparatively lower rate of 5 units
of barley per hour's labor. This significant productivity gap positions China favorably
in the global barley market, indicating its propensity to engage in barley exports to
capitalize on its comparative advantage.

Conversely, Pakistan boasts a comparative advantage in rice production, attributable

to its capacity to generate 3 kilograms of rice per hour's labor, surpassing China's
output of 8 kilograms of rice within the same labor timeframe. This disparity
underscores Pakistan's competitive edge in the rice sector, paving the way for the
country to leverage its comparative advantage and actively participate in rice exports
to international markets.

Q11) Distinct patterns in labor and capital abundance shape the economic landscapes
of Russia and the United Kingdom. Russia boasts a higher labor-to-capital ratio (0.67)
compared to the UK (0.5), indicating surplus labor potential. Conversely, the UK is
capital-abundant, allocating $2 of capital per worker, highlighting its focus on capital-
intensive industries and advanced technologies.
Q12)

As the price of leather rises, firms find leather production more lucrative, prompting
them to expand production, which in turn increases the demand for labor. This surge
in demand leads to a rise in wages. Conversely, the profitability of engine oil
production diminishes, resulting in reduced demand for capital and potentially
lowering the rental rate. The net result is an increase in the wage-rental ratio because
wages increase at a faster rate than the rental rate. Regarding the labor-capital ratio,
the rise in leather production amplifies the overall demand for labor, while the decline
in engine oil production may decrease the demand for capital. However, the exact
impact on the ratio depends on the relative changes in labor and capital. If the increase
in labor outweighs the decrease in capital, the ratio will rise. If the decrease in capital
exceeds the increase in labor, the ratio might fall. There's also the possibility of the
ratio remaining relatively stable if the changes in labor and capital offset each other
proportionally.

Q.13: Industry: Metals and Ores

Germany: $32,824,682,407
Spain: $10,680,541,109
Q.14: France: $15,413,567,465

Q.15: Large Countries exports:

1. Russia = $32,800,805,395
2. 2. Turkey = $16,208,986,279
3. 3. France = $89,705,507,278

Small Countries exports:

1. Luxembourg = $1,622,486,264
2. 2. Andorra = $1,292,375 3.
3. 3. Malta = $416,357,187

The correlation between a country's size and its agricultural exports aligns with the
Heckscher-Ohlin model. Larger nations like Russia, Turkey, and France, abundant in
land resources, excel in agricultural exports, leading to higher export values. In
contrast, smaller European countries such as Luxembourg, Andorra, and Malta, with
limited land availability, engage in less extensive agricultural activities, resulting in
lower export values. This emphasizes the role of a country's land resources in
determining its comparative advantage in agriculture, as outlined by the Heckscher-
Ohlin model. Larger surface areas often enable more efficient agricultural production,
contributing to higher export values, while smaller nations with limited land resources
participate in comparatively less extensive agricultural activities, leading to lower
export values in the agricultural sector.