International Trade ass 2-2 PDF

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INTERNATIONAL TRADE ASSIGNMENT 2 1. Using data from two countries, plot openness versus Industrial Pay Inequality (from for each nation. Use two graphs, one for each country (8 marks). 0 0 0 0 0 0 0 0 0 Industrial Pay Inequality Openness OPENNESS VS INDUSTRIAL PAY INEQUALITY 0 1985 1986 1987 1988 19...

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INTERNATIONAL TRADE ASSIGNMENT 2 1. Using data from two countries, plot openness versus Industrial Pay Inequality (from UTIP-UNIDO) for each nation. Use two graphs, one for each country (8 marks).

450.00%

0.045

400.00%

0.04

350.00%

0.035

300.00%

0.03

250.00%

0.025

200.00%

0.02

150.00%

0.015

100.00%

0.01

50.00%

0.005

Industrial Pay Inequality

Openness

SINGAPORE'S OPENNESS VS INDUSTRIAL PAY INEQUALITY (1985-2005)

0 0.00% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Openness

Industrial Pay Inequality

Figure 1. Singapore’s Openness vs Industrial Pay Inequality (1985-2005)

MALAYSIA'S OPENNESS VS INDUSTRIAL PAY INEQUALITY (1985-2005) 0.045 0.04

Openness

200.00%

0.035 0.03

150.00%

0.025

0.02

100.00%

0.015 0.01

50.00%

0.005 0 0.00% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Openness

Industrial Pay Inequality

Figure 2. Malaysia’s Openness vs Industrial Pay Inequality (1985-2005)

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Industrial Pay Inequality

250.00%

2. Using data from the two countries, calculate the correlation (using excel) between openness and Industrial Pay Inequality (from UTIP-UNIDO) for each nation, respectively. Report and interpret this relationship in up to 100 words. [Hint: The Theil Index is used as a proxy for the ratio of skilled to unskilled wages in empirical studies]. DO NOT ATTACH YOUR DATA TO THE ASSIGNMENT. (7 marks)

Correlation coefficients

Singapore

Malaysia

0.159

-0.317

Table 3. Correlation coefficients of Singapore and Malaysia With the coefficient of 0.159, there is a linear relationship between the two factors, which means an increase in Singapore’s openness leads to a significant small rise in its industrial pay inequality and vice versa. Since Singapore is a developed country, it can benefit from exporting skilledintensive goods and importing labour-intensive goods due to lower opportunity cost. This leads to an increase in the demand for skilled labours and their wages as well as creating unemployment for unskilled labours, which in turn widens the inequality. In contrast, Malaysia’s industrial pay inequality decreases at a low rate when Malaysia becomes more open to trade as it has a negative correlation coefficient. Because Malaysia is a developing country, it tends to export labourintensive goods; thus, unskilled labour will be wanted more and receive more wages. As a result, the inequality is narrowed. (Polpibulaya, 2015).

3. Explain carefully in up to 400 words whether your data agrees or disagrees with the Stolper-Samuelson Theorem. (Remember to accurately define the theorem and discuss how it applies to your countries). (10 marks). Stolper-Samuelson theorem, an implication of Hescher-Ohin model, explains the effect of relative output prices on the prices of production factors under each industry’s zero economic profit and positive production. The theorem is useful in analyzing how factor’s income is affected due to trade liberalization. Assuming a good with two production factors, when relative price of a good increases, the real income of the factor used most intensively in production of that good rises and in return, the real income of other factor falls. More specifically, under Hescher-Ohin model, free trade helps a country’s abundant factor to increases its income and decreases the income of its scare factor. The theorem hints that free trade should raise income inequality in rich countries and reduce it in poorer ones. The data obtain from Singapore and Malaysia both applies for the Stolper-Samuelson theorem. In terms of Singapore, the coefficient of 0.159 illustrates that the more Singapore is open to trade, the higher the industrial pay inequality. As stated before, since this developed country has great technologies and a large number of skilled labours, it will export more skilled-intensive goods and import more labour-intensive goods. As such, when Singapore lowers the tariff on labour-intensive Nguyen Diep Thien Thanh s3618731

goods for trade liberalization, the prices of those goods in Singapore will drop. This will lead to the contraction of labour-intensive industry as local firms cannot compete with foreign firms in unskilled labour abundant countries. Therefore, unskilled labours in Singapore will be either laid off or lowered their incomes. At the same time, more skilled-intensive goods will be produced and the industry keeps expanding leads to an increase in the demand for skilled labours and their wages. As such, skilled workers will be better off and unskilled workers will be worse off when Singapore becomes more open to trade. Regarding Malaysia, the coefficient of -0.317 demonstrates that its income inequality will reduce when the country’s openess to trade increases. Under trade liberization, rich countries would want more labour-intensive products from poorer countries. Since Malaysia is a developing country with scare resource of skilled labours, under radical trade, Malaysia will choose to export more labour-intensive goods due to low opportunity cost of production. Hence, the labour-intensive industry will expands and the prices of labour-intensive products rise. Therefore, more unskilled labours will be demanded and their wages will increase whereas the demand for as well as wages of skilled labours fall. Thus, skilled workers will be worse of and unskilled workers will be better of under Malaysia’s scenario.

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References

Polpibulaya, S 2015, Trade Openness and Income Inequality, TigerPrints, viewed 21 August 2018,

Nguyen Diep Thien Thanh s3618731...