EC 410 – International Economics



EC 410 – International Economics

Homework #3

Due Monday, September 13, 2010

This case is based on events that occurred in the steel industry a few years ago. The story started when the steel prices began to fall. This is what the opening paragraph of the first article refers to “a U.S. steel industry problem”.

Read the articles provided and answer the following questions.

a. What world events caused steel prices to fall?

b. Name some sectors or groups in the U.S. economy that were hurt as a result of falling steel prices.

c. Name some groups that were made better off by falling steel prices.

d. To put this case in the context of the specific factors model discussed in class, think of the U.S. economy as consisting of two sectors, “Steel production” and “Production of everything else”.

State whether you think each of the following factors of production should be considered specific to “Steel”, specific to “Everything else”, or mobile.

- Steel mills

- Steel workers unable to relocate or retrain

- Arable land

- Scrap metal

- Workers willing and able to relocate and retrain

- Managerial skills

- Fertilizer

e. What effect do you expect a U.S. tariff on imported steel to have on the price of steel sold in the U.S.? Support your answer with a supply-and-demand diagram for steel market.

PSTEEL

QSTEEL

f. Use the SFM framework to illustrate the effect of the change in U.S. steel price established in the previous question.

VMPSTEEL VMPE.E.

mobile factor(s) employed in

mobile steel industry

factors employed

elsewhere

State what happens to the (nominal and real)

- well-being of owners of factors specific to the steel sector,

- well-being of owners of factors specific to “Everything else”,

- well-being of mobile factors’ owners.

g. What does the difference between U.S. and world steel prices imply about the pattern of comparative advantage in steel production? According to the Ricardian model, should the U.S. steel industry expand, contract, or preserve its current size? Explain. Do you see any problem with such a recommendation?

h. How was the Bush administration’s plan to impose the tariff different from the EU proposal? Which of the two competing propositions (U.S. or EU) would create stronger incentives for the steel industry to follow the recommendations you provided while answering the previous question?

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