problemset2 - L Karp September 28 2006 International Trade...

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LKarp September 28 2006 International Trade Problem Set 2 The purpose of the f rst two problems is to get you accustomed to using graphical methods to analyze economic problems. You need to know how to identify producer and consumer surplus on a graph, and you need to be able to graph an excess supply (or demand) function - i.e. you have to be able to graph the di f erence between two functions. That part is easy. The trickier part is in using these simple tools. The third problem makes sure that you know how taxes a f ect relative prices. The fourth problem makes sure that you know the relation between a social planner’s problem and a competitive equilibrium. 1) (Background) Use a two-panel diagram. i) In panel a draw a linear supply and demand curve for "the US", and identify the consumer and producer surplus in an autarkic equilibrium. ii) In panel b draw the excess supply function that corresponds to the functions you drew in panel a. iii) In panel b draw a perfectly elastic rest-of-world (ROW) excess demand curveatapr iceh igherthantheUSautarkypr ice .Useth is f gure to identify the world equilibrium price and the level of US exports. iv) In both panels identify the increase in the sum of US producer and consumer welfare that results in moving from autarky to free trade. This increase is the partial equilibrium representation of the gains from trade, for the US. (Be sure you understand this. Don’t bother to continue with the problem until you do.) This exercise should convince you that you can identify the gains from trade (in this partial equilibrium model) either by (i) using the domestic supply and demand curves and looking at the changes in producer and consumer surplus associated with these two curves, or by (ii) using the excess supply (or excess demand) curve, and f nding the surplus associated with this curve.
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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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problemset2 - L Karp September 28 2006 International Trade...

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