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ECN307 Assignments

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ECN307 International Trade: Homework assignments (Fall 2011)

Assignment 1. The gravity model of trade: do size and distance matter for the exports of (fill in name of your country)?
The due date is Thursday 15 September 2011 at the beginning of class. Start in time. Start by reading: the rules for written work the section on APA Style from the textbook from your Critical Thinking and Academic Writing courses (Glenn et al., 2004, pp. 652-679, or Kirszner and Mandell, 2011, chapter 35, pp. 236263) the document on how to typeset math (pdf) (optional) the introduction to R (pdf) The gravity model of trade (Krugman et al. (2012), equation 2-1 p. 43) predicts that trade increases with the partner country's GDP: the bigger your trade partner's GDP, the more you trade with that partner country. The model also predicts that trade decreases with the distance to the partner country: the further away your trade partner, the less you trade with that partner country. In this assignment, you'll test these hypotheses by making two scatter plots and computing the coefficients of correlation for each scatter plot. You picked a country after the class of September 1 (If you don't remember which one, mail me; I'll post the list soon). First, you have to collect the data. Bilateral trade data with the ten biggest trading partners are in the Country Trade Profiles from: United Nations. (2009). 2009 International Trade Statistics Yearbook. New York: United Nations ( http://comtrade.un.org/pb/CountryPagesNew.aspx?y=2009 ). To keep things simple, we'll use exports rather than total trade (exports + imports) to test the gravity model. Nominal GDP data are available from: International Monetary Fund. (2010). International Financial Statistics Yearbook 2010. Washington, DC: International Monetary Fund. Available in print in the VUB library. As the bilateral exports data are in millions of USD, you have to convert nominal GDP also to millions of USD. You can find the appropriate exchange rate in International Monetary Fund (2010), too. In the paper, show your work to convert GDP to millions of dollars for one country. Trade and GDP data should be for the same year. Distance data are available from http://www.cepii.fr/anglaisgraph/bdd/distances.htm Cite the source as: Centre d'tudes Prospectives et dInformations Internationales (CEPII) (2011). Geodesic distances. Retrieved on (write the date) from http://www.cepii.fr/anglaisgraph/bdd/distances.htm The file dist_cepii.xls contains distances between countries. The downloaded file is a compressed file
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(dist_cepii.zip); double-click dist_cepii.zip to expand it to dist_cepii.xls. The dist_cepii.xls file is a spreadsheet file in Microsoft Excel format, that can be opened by Excel and by most other spreadsheet programs (such as OpenOffice Calc or Apple's Numbers). The distances are in kilometers. The country codes are three-letter ISO codes (e.g., Belgium is BEL). The list of ISO country codes is here: http://unstats.un.org/unsd/methods/m49/m49alpha.htm. Your paper should have a table (table 1) with the relevant data for the top-10 export destinations: country, exports (USD), GDP of destination country (USD), and distance to destination country (km). Put the table on a separate page at the end of the paper. Second, make two scatter plots. The first scatter plot (figure 1) focuses on size (GDP) as a determinant of trade. It has GDP (as a percent of the GDP of all top-10 export destinations) on the horizontal axis, and exports (as a percent of the exports to all top-10 export destinations) on the vertical axis, like figure 2-3 on p. 44. The second scatter plot focuses on distance as a determinant of trade. You want to remove the effect of the destination country's size (GDP) on trade. From equation (2-1) it follows that: Tij/Yj = A Yi /Dij The left-hand side variable Tij/Yj is exports to partner country j as a percentage of the GDP of partner country j (e.g., exports from your country to Germany as a percentage of Germany's GDP). So you need to compute (for each of the top-10 export destinations) Tij/Yj (times 100 percent to get a percentage). This scatter plot (figure 2) has distance (in km) on the horizontal axis, and exports (as a percent of the GDP of the destination country) on the vertical axis. You can draw the scatter plots by hand on squared paper, or use a spreadsheet program or statistical software (like R; see the link to the R scripts at the end of this paragraph; if you know R, you can easily adapt the scripts). In any case, make sure the axes are labelled (variable and units of measurement) and the points are labelled with the country names or codes. It's OK to handwrite the axis labels and point labels. Here are examples: figure 1 (pdf) and figure 2 (pdf) for the US (generated using the R script for figure 1 and R script for figure 2). Here's the US data set. The coefficient of correlation (r) between two variables measures the degree of linear relationship between two variables. The coefficient of correlation takes values between -1 (perfect negative linear relationship; in a scatter plot, the points are exactly on a straight downward sloping line) and +1 (perfect positive linear relationship; ; the points are exactly on a straight upward sloping line). A value of 0 indicates no linear relationship. The linear relationship is usually said to be: weak if r is near zero (-0.5 < r < 0.5) strong if r is near -1 or +1 (r 0.8 or r -0.8) moderate if r is neither near -1 or +1 nor near 0 (0.5 < r < 0.8 or -0.8 < r < -0.5) You can compute a coefficient of correlation using statistical software (like R, SPSS, or TSP). or using a scientific calculator or a spreadsheet program. The R script shows how to compute a coefficient of correlation. The formula sheet for STA101 posted on my STA101 home page explains how to compute a coefficient of correlation with calculators of the TI-83 or TI-84 family. To compute a coefficient of correlation in a spreadsheet program, first make sure the two variables are in two columns. Put your cursor in an empty cell. Select Insert > Function > Correlation (CORREL or something like that). The function asks you to select the cells with the yaxis values, then the cells with the x-axis values. Press return: the cell should now display the value of the coefficient of correlation. If needed, consult the help function of your spreadsheet program.
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For each of the two scatter plots, compute the coefficient of correlation. Discuss the two scatter plots and the coefficients of correlation. Does trade tend to increase with the partner country's GDP and decrease with distance? The report should have the format set out in my rules for written work: a brief abstract (about 50 words will do) and the full report (about 300 words). Find two appropriate JEL (Journal of Economic Literature) Classification Codes describing the subject of your paper. Most economists use JEL Classification Codes to attach standardized subject descriptors to their papers. For a list see JEL Classification Codes. At the end of the abstract, include within brackets the JEL Classification Codes, something like this: (JEL C210, L620). Start the main text with a general introduction (no header) briefly introducing the gravity model, explaining how you will test it, and which data sources you'll use. In the next paragraph, briefly describe the data (table 1). Then discuss the scatter plots and the coefficients of correlation. Include figures 1 and 2 at the end of the paper. The References section should contain at least the data source and Krugman et al. (2012) (to which you should refer in your paper). Start on time. If you run into trouble, ask me for help.

Assignment 2: Factor proportions and the pattern of trade of ... (fill in the name of the country you picked for assignment 1).
Due on Thursday 6 October 2011 at the beginning of class. Start by reading: the rules for written work the section on APA Style from the textbook from your Critical Thinking and Academic Writing courses (Glenn et al., 2004, pp. 652-679, or Kirszner and Mandell, 2011, chapter 35, pp. 236263) the document on how to typeset math (pdf) Krugman et al. (2012, p. 134) summarize the factor proportions theory of trade as follows: "A country that has a large supply of one resource relative to its supply of other resources is abundant in that resource. A country will tend to produce relatively more of goods that use its abundant resources intensively. The result is the basic Heckscher-Ohlin theory of trade: Countries tend to export goods that are intensive in the factor with which they are abundantly supplied." (It's a good idea to cite or paraphrase this quote in the introduction of your paper.) From the top-ten trading partners of your country from assignment 1, pick a partner that you expect to differ quite a lot from your country in terms of relative factor endowments (labor-to-capital ratio, labor-to-land ratio). Find for a recent year net trade (export - imports) of your country with the selected trading partner for the categories: SITC Rev. 2 code 04: cereals and cereal preparations SITC Rev. 2 code 71: power-generating machinery and equipment SITC Rev. 2 code 84: articles of apparel and clothing accessories (SITC stands for Standard International Trade Classification, a classification of goods used to classify the
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exports and imports of a country). Report exports, imports, and net exports in a table (table 1). Find the labor-to-capital ratio (expressed as no. of workers per $100,000 of capital) for each of the two countries, and compare. Is your country labor-abundant or capital-abundant compared to the partner country? Producing power-generating machinery and equipment is probably capital intensive. Given the labor-to-capital ratios, would factor-proportions theory predict your country to be a net exporter of power-generating machinery and equipment to the chosen trade partner, or a net importer? Is the prediction borne out by the facts? Producing articles of apparel and clothing accessories is probably labor intensive. Given the labor-to-capital ratios, would the factor-proportions theory predict your country to be a net exporter of articles of apparel and clothing accessories (SITC 84) to the chosen trade partner, or a net importer? Is the prediction borne out by the facts? Find the labor-to-land ratio (expressed as the no. of workers per 1000 hectares of agricultural land area) for each of the two countries. Show your work. Compare. Is your country labor-abundant or land-abundant compared to the partner country? Producing cereals is probably land-intensive. Given the labor-to-land ratios, would factor-proportions theory predict your country to be a net exporter of cereals and cereal preparations (SITC 84) to the chosen trade partner, or a net importer? Is the prediction borne out by the facts? The data sources : agricultural area: Food and Agriculture Organisation (FAO). (2011). FAOSTAT web site. Retrieved on .... (write the date) from http://faostat.fao.org/ (follow the links: Resources > ResourceSTAT > Land) trade: United Nations. (2011). UN COMTRADE: United Nations Commodity Trade Statistics Database. Retrieved on .... (write the date) from http://comtrade.un.org. (Follow the links: Database > Data Query > Shortcut Query; the classification is SITC Rev. 2; in the box "of:" just type the name of the category, e.g., power-generating machinery and equipment) labor force (two possible sources: use the same source for both countries): International Monetary Fund. (2011). International Financial Statistics Yearbook 2011. Washington, DC: International Monetary Fund. (available in print in the VUB library); or: International Labour Office, LABORSTA Internet. Retrieved on ... (write the date) from http://laborsta.ilo.org/ (Follow the links:Total and Economically Active Population > Economically Active Population. View data selection (link top right) (active population is the same as labor force). capital per worker: Weil, D. (2011). Companion website to Economic Growth. Retrieved on .... (write the date) from http://wps.aw.com/aw_weil_econgrowth_2/ (Follow the links: Classroom Resources > Data Plotter). Physical capital per worker is expressed in dollars. Convert physical capital per worker to no. of workers per $100,000 of capital (a measure of the labor-to-capital ratio). Show your work for one country. [UPDATE] If Weil (2011) does not cover one or both of the two countries, here's how you can estimate capital per worker for the two countries. Go the Penn World Table (http://pwt.econ.upenn.edu/). Cite your source as Heston, A., Summers, R. and Aten, B. (2011). Penn World Table Version 7.0. Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania. Retrieved on (write the date) from http://pwt.econ.upenn.edu/. Follow the links PWT data download > PWT 7 > Data download. Select your two countries. Select
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variables rgdpwok (PPP Converted GDP Chain per worker at 2005 constant prices) and ki (Investment Share of PPP Converted GDP Per Capita at 2005 constant prices). Compute the product (ki/100)*rgdpwok for the last 10 years for which data exist for both countries; this product is investment per worker. If we assume that capital has a lifetime of 10 years (depreciates at about 10 percent per year), capital accumulated more than 10 years ago has completely worn out. The capital stock per worker can be approximated by the sum of investment per worker accumulated over the previous 10 years. If you use this approximative method for the US, the result for 2000 is $ 138 440; the number in Weil (2011) is $ 148 100, which is in the same ballpark. Given the difference, it's best to use this method to find the capital stock per worker for both countries, even if the Weil (2011) dataset has the data for one of the two countries.) The report should have the format set out in my rules for written work: a brief abstract and the full report (300600 words). Find two appropriate JEL (Journal of Economic Literature) Classification Codes describing the subject of your paper. Most economists use JEL Classification Codes to attach standardized subject descriptors to their papers. For a list see JEL Classification Codes. At the end of the abstract, include within brackets the JEL Classification Codes, something like this: (JEL C210, L620). Start the main text with a general introduction (no header) briefly introducing the theory, explaining how you will test it, and which data sources you'll use. In the next paragraph, discuss the results. Include a table (table 1) with exports, imports, and net exports for the three SITC categories. The References section should contain at least the data sources and Krugman et al. (2012) (to which you should refer in your paper). Start on time. If you run into trouble, ask me for help.

Assignment 3: The effect of terms of trade changes on welfare in ... (fill in the name of the country you picked).
Due on Thursday 10 November 2011 at the beginning of class. [ For assignments 3 and 4, you can submit one paper per group of two students. ] Start by reading: the rules for written work the section on APA Style from the textbook from your Critical Thinking and Academic Writing courses (Glenn et al., 2004, pp. 652-679, or Kirszner and Mandell, 2011, chapter 35, pp. 236263) the document on how to typeset math (pdf) (optional, if you want to use R) STA101_Using_R.pdf Objectives of the research project. The title is: The effect of terms of trade changes on welfare in ... (fill in the name of the country you picked) The objectives of this project are: to make you acquainted with International Monetary Fund, International Financial Statistics Yearbook as a key source of economic data; to make you acquainted with the organization of the statistical data section of the VUB library;
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to study how a country's terms of trade have evolved over time, and to let you compute the effect of the observed change in the terms of trade on a country's welfare. The research questions The research questions are: for a given country, how did the terms of trade change in the last decades? by how much did the observed increase (or decrease) in the terms of trade increase (or decrease) the country's GDP? The data are available for the following countries: United States, Canada, Australia, Japan, New Zealand, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Denmark, Iceland, Norway, Sweden, Switzerland, United Kingdom, Kenya, Mauritius, Morocco, South Africa, China, India, Korea, Pakistan, Philippines, Singapore, Thailand, Hungary, Poland, Turkey, Israel, Jordan, Syria ("Syrian Arab Republic"), Argentina, Brazil (but you can't take Brazil), Colombia. Pick a country (not Brazil). Every country can be taken only by one group. Pick a country. Make sure you didn't pick the same country as your class mates. It's first-come, first-serve. Here's the list of countries and students so far. Send me a mail (luc.hens.econ@vub.ac.be) with your country and your names in the subject line: ECN307 name.of.country: firstname LASTNAME of student 1, firstname LASTNAME of student 2. Read Krugman et al. (2011), Chapter 6, especially the section the "The Welfare Effects in the Terms of Trade" (pp. 146-147) and the case study "Has the Growth of Newly Industrializing Countries Hurt Advanced Nations" (pp. 152-153). Krugman et al. (2011) state that "(...) the percentage real income effect of a change in the terms of trade is approximately equal to the percent change in the terms of trade, multiplied by the share of imports in income" (p. 153; a formal proofonly accessible to students who know calculusis on p. 697). You will use this formula to find the effect of the change in terms of trade on real GDP for the country assigned to you. That means that you need data on the country's terms of trade and its share of imports in GDP. The data source The data source is: International Monetary Fund. (various years). International Financial Statistics Yearbook . Washington, D.C.: International Monetary Fund (available in VUB library), or the on-line version of International Financial Statistics (IFS) (available from www.imf.org). The International Monetary Fund is a major international organization located in Washington, D.C. One of its tasks is to collect and disseminate economic and financial data at the country level. International Financial Statistics is one of the periodical publications containing macroeconomic numbers. There are a monthly issues and a yearbook. Both are available in print at the VUB library, and as pdf files from www.imf.org; the web site also gives access to a data base containing consistent time series longer than the one in the print editions. You can take a free five-day trial subscription to the on-line version of International Financial Statistics (IFS). You can save the data as a comma-separated values file. Go to the library and look up the call numbers of the print editions (monthly and yearbook) of International Financial Statistics using the VUB computer catalog (a call number is a code like "301.01 E AER" that allows you to physically locate a work in the libraryI assume that you know how the VUB library is organized). Note that the monthly issues of the current year are kept in a different location than the issues of previous years. You'll
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need the yearbooks, not the monthly issues of the current year. Pick up a recent copy of the yearbooks. Scan the table of contents to understand how each issue is organized and what kind of numbers you can find in International Financial Statistics, and browse the issue. To compute a country's terms of trade you'll have to collect time series for export prices (also called "Export Unit Values") and import prices (also called "Import Unit Values"). Take the longest time period for which data are available in the Yearbook. The tables of export prices and import prices are in the "World Tables" section (consult the table of contents). Carefully document the exact source of your data, including the page and the issue of International Financial Statistics Yearbook, and record the units of measurement (If you photocopy pages from International Financial Statistics, make sure you can read the units of measurement; units of measurement are usually unreadable in a photocopy because they are printed near the spine of the tome). Alternatively, I encourage you to take a free 5-day trial subscription to the on-line version of International Financial Statistics (IFS) on www.imf.org and retrieve the data from the site. In that case, go back as far as 1971. Calculations Compute the terms of trade for each year of the time series (or the l). In the paper, show your work for one year (not the base year). Create a time series diagram (figure 1 + appropriate title + note documenting the data source) with a time trend line. A time trend is the line of best fit to a time series diagram. You don't have to report the equation of the time trend. You can draw the time series diagram by hand on squared paper, or use a spreadsheet program (OpenOffice Calc, Numbers, or Excel) or statistical software (like SPSS, TSP, Stata, Eviews, Gretl, or R; see the link to the R scripts at the end of this paragraph; if you know R, you can easily adapt the scripts). In any case, make sure the axes are labelled (variable and units of measurement). It's OK to handwrite the axis labels. You can compute a time trend using statistical software, or using a scientific calculator or a spreadsheet program. The formula sheet for STA101 posted on my STA101 home page explains how to compute a line of best fit with calculators of the TI-83 or TI-84 family (see: regression line). To compute a trend line in a spreadsheet program, consult the help function of your spreadsheet program. Here is an example of the R script for Brazil. Here's the time-series diagram: Brazil_terms_of_trade.pdf Discuss the evolution of the terms of trade over time: is the time trend up or down? Do the terms of trade show a lot of variability around the trend or not? Are there periods that show particularly large swings? Pick a year when the terms of trade showed a remarkable increase or decrease. Find the percentage change in the terms of trade in that year. Compute how much the observed increase (or decrease) of the terms of trade added (or subtracted) from the real GDP growth in that yea, using the formula (Krugman, Obstfeld, amd Melitz, 2012, p. 153): (% change in GDP due to terms of trade) (% change in the terms of trade) (share of imports in GDP) The share of imports in GDP can be computed from the national accounts data in the country tables. Take imports and GDP for the year you picked. If the imports were 23 million reais and GDP was 400 milion reais, the share of imports in GDP was 0.0575 (or 5.75%); in the calculations you'll have to use the decimal fraction, not the percentage. Show your work in the paper and carefuly document your data source. Don't forget the units of measurement.
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In the paper, show your work. Discuss the result. Did the terms of trade have a positive of a negative effect on the annual growth rate of real GDP? Was the effect big or small? Write up the report in the format set out in my rules for written work: an abstract, the main text (including a proper introduction) (300-600 words), and a complete References section. Organize the text to make the story cohere. The figure can be copied and pasted into the main text document, or be included at the end. Don't include a data appendix, but include a detailed source note at the bottom of the figure.

Assignment 4: Critical review of a scholarly article

The title is: A critical review of Pritchett (2009) (instead of Pritchett (2009), fill in the author and year of the paper you picked). You have to submit the article you will review by 24 November 2011 (in an email to luc.hens.econ@vub.ac.be, with in the subject line ECN307 Assignment 4: article, in the body of the text the full bibliographical reference in APA Style and the abstract, and the pdf of the article as an attachment). Paper due on Thursday 8 December 2011 at the beginning of class. [ For assignments 3 and 4, you can submit one paper per group of two students. ] Start by reading: the rules for written work the section on APA Style from the textbook from your Critical Thinking and Academic Writing courses (Glenn et al., 2004, pp. 652-679, or Kirszner and Mandell, 2011, chapter 35, pp. 236263) Objectives of the research project The objectives of this project are: Skill 1. Access existing knowledge: Retrieve information on particular topics and issues in economics. Locate published research in economics and related fields. More specifically, to make you acquainted with EconLit , a key source of economic bibliographical data, with refereed scholarly journals and the articles they publish, and with the organization of the VUB library; Skill 2. Display command of existing knowledge: Write a precis of a published journal article. Locate in the EconLit database (accessible via the VUB network: link) an empirical research article about international related to a chapter or paragraph from Krugman, Obstfeld and Melitz (2012, Ch. 2-12). The article should have been published in a scholarly peer-reviewed journal (so no working papers). An empirical article is an article that tests a hypothesis (derived from a theory) using data. Survey or review articles that give a critical overview of a research stream are not suited for this assignment; nor are theoretical articles that develop a new theory without testing it on real-world data. You have to submit the article you selected to me for approval in advance: send at least two weeks before the due date of the paper an email to luc.hens.econ@vub.ac.be, with in the subject line ECN307 Assignment 4: article, with in the subject line ECN307 Assignment 4: article, in the body of the text the full bibliographical reference in APA Style and the abstract, and include the pdf of the article as an attachment. Your article is approved only after you received an e-mail from me. Possible journals are:
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Journal of International Economics, Weltwirtschaftliches Archiv , International Trade Journal. Some of the (many) possible authors are: Vinod Aggarwal, Sven Arndt, Robert Baldwin, Richard Baldwin, Jagdish Bhagwati, Andrew Bernard, David Dollar, Simon Evenett, Robert Feenstra, Douglas Irwin, Edward Leamer, Marc Melitz, Dani Rodrik, Daniel Trefler. The title of your paper is: A critical review of Pritchett (2009) (instead of Pritchett (2009), fill in the author and year of the paper you picked). In a first section (header: Summary of Pritchett (2009); instead of Pritchett (2009), fill in the author and year of the paper you picked), summarize the article in about 300 words: what is the research question, what is the hypothesis, which data were used, which method was used to test the hypothesis, what are the results (including key numbers, such as estimated regression coefficients, and their meaning)? For an example of such a summary, refer to the Economics Focus section of The Economist newspaper. In a next section (header: Discussion of Pritchett (2009); instead of Pritchett (2009), fill in the author and year of the paper you picked), relate the research in the article you read to a relevant section in Krugman, Obstfeld and Melitz (2012, Ch. 2-12) (about 150-300 words). Refer explicitly (by page number) to the relevant section(s) in Krugman, Obstfeld and Melitz (2012). Does the article contradict, confirm, or complement the arguments in Krugman, Obstfeld and Melitz (2012)? How? Your report should have a references section containing the article and Krugman, Obstfeld and Melitz (2012). No separate abstract and EconLit codes, this time. Start on time. If you run into trouble, ask me for help.

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