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midterm3%20solutions - NAME Midterm Exam Economics 181...

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NAME Midterm Exam Economics 181 PLEASE SHOW YOUR WORK! PUT YOUR NAME AND TA’s NAME ON ALL PAGES 100 Points Total PART I. Short-Answer. (40 points). Please explain your work whenever possible. Each of the following 8 questions is worth 5 points each. 1. True or False? George Soros recently pointed out in the San Francisco Chronicle that although international trade leads to overall gains for the whole population, there are some individuals who lose from international trade. An excellent illustration of this idea is represented by the Ricardian model. FALSE. In the Ricardian framework there are no losers from trade as there is no way of observing distrubtional impacts within each country. 2. True or false? Evidence suggests that in the United States an increase in the supply of skilled labor relative to unskilled labor has contributed to an increase in inequality. Other factors, such as such as globalization and skill-biased technical change, have also contributed to rising inequality. FALSE. An increase in the supply of skilled labor should DECREASE inequality. Overall there has been an increase in the relative supply of skilled labor in America (depite the impacts of immigration). However other factors such as skill biased technical change, and increased trade with low-wage countries have contributed to an increase in inequality. 3. True or false? Larry Summers once proposed that developing countries should dispose of pollution because they have a comparative advantage in this area. The answer wanted was TRUE, a document under Larry Summers' name did make such a recommendation. However since many people had difficulty interpretting this question, everyone was automatically given the 5 marks. 4. You are given the following unit labor requirements: TVs Whiskey Britain 40 1 Japan 20 ½ Are there gains from trade? Show your work. The autarkic relative price of TVs in terms of Whiskey is 40 in both countries. Since they are equal, there would be no gains from trade. 1
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2 5. True or false? While the Ricardian model predicts that there will be wage differences in the world as a result of differences in technology, the specific sector model suggests that wages should equalize as a consequence of international trade. FALSE. The specific sector model does not predict wages equalize across countries. It is the Factor Price Equalization Theorem from the Hecksher-Ohlin framework that makes this prediction.
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