International Economics Professor Carlos GomezD

Pauta Solemne 1
November 13, 2018
Name:

I. Mexican and Chilean workers produce tons of fruit and meat per week according to the following
table:

Tons of meat per week Tons of fruit per week

Mexico 3 6

Chile 4 12

A. Fill in the following table with the opportunity costs of producing fruit and meat in each country.
(5p)

Opportunity cost for 1 ton Opportunity cost for 1 ton

of meat of fruit

México 2 0.5

Chile 3 0.33

Using the numbers from both tables answer the following questions:

B. Which country has absolute advantage to produce meat? (5p)

Chile because produces 4 and Mexico 3

C. Which country has absolute advantage to produce fruit? (5p)

Chile because produces 12 and Mexico 6

D. Which country has a comparative advantage to produce meat? (5p)

Mexico because has a cost of 2 lower than Chile’s 3

E. Which country has a comparative advantage to produce fruit? (5p)

Chile because it has a cost of 0.33, lower than Mexico’s 0.5

F. If Chile can trade 12 tons of fruit for 6 tons of meat from Mexico, is Mexico willing to trade?
Why? (5p)

It is not willing. It is indifferent because the value for Mexico of receiving 12 tons of fruit is exactly 6
t of meat because it needs 2 weeks to produce 12 tons of fruit in which tome can produce 6 tons of
meat. So, if it has to give up to Chole the same 6 tons of meat, Mexico is indifferent to trade.

G. If Chile can trade 12 tons of fruit for 5 tons of meat from Mexico, is Mexico willing to trade? How
much does Chile gain in terms of meat? How much does Mexico gain in terms of meat? (5p)

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 International Economics Professor Carlos GomezD

Yes, it is willing to trade because now it gains 1 ton of meat since in 2 weeks produces 6 and gives
up to Chile only 5 (gains 1). Chile also gains 1 (5 - 4).

II. Brazil has a 50% tariff over Ford cars imports with both the US and Argentina. Initially, Brazil
imports cars from the US with a 50% tariff (Why? (10p)). Because, with 50% tariffs, it is cheaper to
buy to the US: 15 instead of 18 Brazil decides to eliminate tariffs on Ford cars imports through a

Price Price
(0% tariff) (50% tariff)
Argentina 12 18

USA 10 15

custom union with Argentina. Ford cars prices are given in the table below.

A. Using the graphic below, calculate the benefits (trade creation) and costs (trade diversion) to
Brazil of creating a custom union with Argentina instead of with the US. (15p)

Trade creation:

Eliminating tariffs with Argentina lowers the price form 18 to 12. Brazil gains the 2 triangles: 2 x
(3 x 10)/2 = 30

Brazil losses the rectangle because it missed the opportunity to trade with the USA at a price of
10: 20 X 2 =40

B. Did Brazil make the best decision? Why? (15p)

It did not. It should have formed a customs union with the US that has a lower price (10) than Argentina
(12).

III. Explain two key differences between Portfolio Investment flows and Direct Foreign Investment
flows. (5p)

Portfolio Investment is more short term and liquid than FDI. It is also investment in stocks and bonds
while FDI is investments in fixed, real assets in a foreing country.

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 International Economics Professor Carlos GomezD

IV. Explain two reasons that motivate Chilean investors to invest in a foreign country through Portfolio
investments and Direct Foreing Investment (two reasons for each type of investment). (5p)

Pcars

18

Gain Gain
12

Loss

10

Cars
10 20 30 40 50 60 70 80

Portfolio Investment: Higher returns abroad, risk diversification, uncorrelated returns between countries

DFI: higher returns abroad, retain control instead of licensing, reduced labor and inputs costs.

V. Explain three reasons that motivate Multinational Companies (MNCs) to invest abroad. (5p)

Competitive advantage

Economies of scale

Transfer pricing (taxes)

Buy up competitors
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 International Economics Professor Carlos GomezD

VI. In reference to the reading on “El ministro de Bolsonaro”, explain two economic proposals that
minister Paolo Guedes is planning to introduce in Brazil. (5p)

Privatize public companies

Introduce the Chilean pension system

Lower tariffs to international trade

VII. In reference to the reading “La petición de Bastiat”, clearly explain why Bastiat believes that the
French parliament is not consistent in its arguments for prohibiting oranges from Lisboa and not
protecting candle domestic producers from the sun. (5p)

Because since it does not prohibit the sun which is free, it should not prohibit oranges that we get from
Lisboa at a far lower cost than in France.

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