The U.S. Transportation Equipment Sector Questions

The U.S. Transportation Equipment Sector Questions

 
Paper Instructions



1. Consider the following information for the U.S. Transportation Equipment sector (actual data for 2004 in billions of dollars, from www.bea.gov):







 
Exports
Imports


Automotive (cars, trucks, buses & parts)
88.2
228.2


Aircraft (airplanes and parts)
50.3
27.0







a. Calculate the Grubel-Lloyd index of intra-industry trade (Bi) for each sector (automotive and aircraft) separately and also for total trade in transportation equipment (the sum of automotive plus aircraft). How do the indexes for the individual sectors compare with the total? Discuss and explain your results.



b. Suppose you discover that a large portion of the automotive imports are labor-intensive parts rather than finished cars, while the exports are mostly capital-intensive finished vehicles. How would this change your impression as to whether the U.S. has “intra industry” versus “inter-industry” trade in automotive products? How would the finding that automotive imports are labor intensive parts and exports are capital intensive finished goods affect your view of the likelihood that job displacement due to trade would occur?



2. Consider a Heckscher-Ohlin model of US trade with East Asian newly industrializing countries (China, Korea, Taiwan, etc., which we’ll call “EA”). Suppose that the two factors of production are capital (K) and labor (L). The price of capital is denoted by r and the wages of labor are w. The U.S. is capital-abundant. There are two goods, X (electronic gadgets) and Y (heavy machinery), and good X is labor-intensive.



a. Give precise definitions of what it means for the U.S. to be capital-abundant and for good



 X to be labor-intensive in this model.   Can you tell from this information which “country” (US or EA) has absolutely more capital? More workers? Why or why not?



b. Draw the production possibility frontiers (PPFs) and demand curves for the two countries, showing the autarky [no trade] equilibria (consumption and production points) as well the autarky relative prices and the free trade relative prices, production, and consumption points.  Show which country has a comparative advantage in each good and explain.



c. Analyze the predicted effects of free trade on income distribution in the US and EA using the Stolper-Samuelson theorem.  Which factor owners are predicted to gain or lose in each country? Why? Should trade liberalization between the US and EA lead to more or less inequality, in the US and EA, according to this model? Discuss and draw diagrams showing predicted changes in factor prices. (You may assume that capital owners are richer than workers to begin with.)



d. Suppose there is no free trade, but labor can migrate freely from one country to another.  Which way would workers migrate? Why? What if capital were mobile—which country would capital move out of and which country would it be invested in? Why? How would the distributional effects of such factor mobility compare with the effects of trade discussed in part c.?



3. Suppose that there are two factors of production, capital and labor, and that there are two industries, capital-intensive airplanes and labor-intensive automobiles, in the U.S. economy. Thus, there are four groups of factor owners:



Airplane capitalists (Boeing stockholders)                                   Airplane workers



Automobile capitalists (GM & Ford stockholders)           Automobile workers




If the U.S. is capital-abundant and the Heckscher-Ohlin theory is true (assuming factor mobility), what is the predicted direction of trade that is what does the U.S. export and import?




i. In this case, which groups of factor owners do you expect will favor free trade and



which will favor protection? Why? Explain.




Now consider what happens if there are one or more “specific” factors—who will be the winners and losers from trade under each of the following conditions (if some group’s gains depend on what that group consumes, state who and explain why):





Capital and labor are both immobile, i.e., “specific” to each industry.





Labor is mobile between the two industries, but the capital in each sector is specific and immobile (e.g., because of different types of machinery and equipment).  Also, workers mainly consume automobiles not planes, meaning they spend more on automobiles than plans.





Reverse of ii: Capital is mobile between the two industries, but labor (which has sector-specific skills) is immobile.  Capital mainly consumers planes versus automobiles.




c. Now suppose instead that this trade follows a Krugman model of intra-industry trade (IIT) with scale economies, and that automobiles and airplanes are “differentiated products.” Who would gain from the trade—and how would they gain? would there be any losers?  Discuss.



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