finalexamwkey2006

finalexamwkey2006 - Your Name Here Please return this exam...

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Your Name Here: Please return this exam paper. International Trade 2006 Final exam 1) [15 points] Consider a two-country two-good Ricardian model with labor input requirements unit labor requirement Food cloth US a u food = 1 a u cloth = 1 Canada a c food = 3 a c cloth = 6 Table 1, Labor requirements The US has 100 units of labor and Canada has 60 units of labor. See Figure 1 for the world production possibility frontier. Consumers in both countries have the same Leontief utility function (0 substitutability): at all prices they consume in fi xed proportions, at x units of cloth for every 1 units of food, where x > 0 is a parameter. a) Give a su cient condition for the value of x under which both countries bene fi t from trade. b) Is this condition necessary and su cient? Explain brie fl y. Comments: I wanted to see if you knew that a necessary and su cient condition for a country to gain from trade is that the price at which it trades is di ff erent than its autarchic price; this can occur only if production (= consuption) occurs at the kink of the PPF. Answer: a) A country bene fi ts from trade if and only if the price at which it trades is di ff erent than the autarkic price. In the Ricardian model this requires that each country is specialized, i.e. production occurs at the intersection of the two lines F = 120 C and F = 220 2 C . This intersection satis fi es 120 C = 220 2 C , Solution is: { C = 100 } , so the intersection is (100,20). 1
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The income expansion path is a ray from the origin through the point (x,1), so it has slope 1/x. Demand equals supply and production occurs at (100,20) if and only if 1 x = 20 100 , Solution is: { x = 5 } . b) The condition for a country to gain from trade is necessary and su - cient, so x = 5 is necessary and su cient. 2) [15 points] There are two commodities, food and cloth. Food is the numeraire. The relative world price of cloth is p . Home, a small country, imports food. (Remember that a "unit" tax or subsidy means that the tax or subsidy is on each unit of the item. In contrast, an ad valorem tax or subsidy is calculated as a percentage of the price.) Fill in the blanks a) Home uses a unit export subsidy of s , The relative price of cloth for domestic consumers 1 is. p + s . and the relative price of cloth for domestic producers is p + s . b)Home uses (only) a unit production tax of t on cloth. The relative price of cloth for consumers is p and the relative price of cloth for producers is p t .
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