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 f 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 f t from trade. b) Is this condition necessary and su cient? Explain brie F 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 f erent than its autarchic price; this can occur only if production (= consuption) occurs at the kink of the PPF. Answer: a) A country bene f ts from trade if and only if the price at which it trades is di f 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 =1 2 0 C and F =2 2 0 2 C . This intersection satis f es 120 C =220 2 C ,So lut ionis
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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 ,So lut ionis : { 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 .andthere lat ivepr iceo f 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
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This note was uploaded on 08/01/2008 for the course ARE 201 taught by Professor Karp during the Fall '07 term at Berkeley.

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

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