Problem Set 1.pdf - Econ 280A Prof Andres Rodriguez-Clare...

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Econ 280AProf. Andres Rodriguez-ClareProblem Set 1Fall 2017 - Due (typed) in class September 6th, 2016Problem 1: More trade is not always good.Consider a neoclassical trade model with two countriesAandB(indexed byn) and a single household with identical and homothetic preferences per economyand imagine that we move from an equilibrium where onlyg= 1, ..., g1goodsare traded withg1< Gto an equilibrium where allGgoods are traded. (Goodsare either traded or not: if they are traded, they are traded with no trade costs.)Use following notation: superscript 1 for variables in equilibrium 1 (i.e., onlyg1< Ggoods are traded) and superscript 2 for variables in equilibrium 2 (i.e.,allGgoods are traded), so(ynj, cnj, pnj)is the vector of output, consumption,and good prices in countrynin equilibriumj= 1,2, andunjis the utility levelin countrynunder equilibriumj.1. Derive a sufficient condition such that economyn=A, Bis better offunder equilibrium 2 than equilibrium 1.Give an interpretation of thiscondition.2. Show that the world economy is better off in equilibrium 2 than in equi-librium 1. That is, there are international transfers such that everyone is(weakly) better off in equilibrium 2 than in 1.Problem 2: Welfare analysis with tariffsConsider the neoclassical trade model of Lecture 1 and assume that the

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