Economics 181

Economics 181 - 10/05/2000 THU 17:40 FAX 6434330 MOFFITT...

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Unformatted text preview: 10/05/2000 THU 17:40 FAX 6434330 MOFFITT LIBRARY 001 Econ 181, Fall 1996 Elisabeth Sadoulet and Alain de Janvry Carlos Serrano, Joshua Skov, and Yongmei Zhou Final examination (Total of 100 points) Your name: __ Your TA: Answers all multiple choice questions 1 to 8 (1.5 points each) 1. In the specific—factor model, opening an economy to free trade will: a. Decrease wage relative to the import price b. Benefit the fixed factor of the export sector c. Benefit the fixed factor of the import sector d. Any of the above 2. If the assumptions of the Heckscher-Ohlin model are true, free international trade will, inside each country a. Benefit everyone, but a country’s abundant factor more than its scarce factor. b. Benefit the scarce factor relative to the abundant factor, but both absolutely. c. Raise the real income of the scarce factor and reduce that of the abundant factor. (1. Raise the real income of the abundant factor and reduce that of the scarce factor. 3. The Rybczynski theorem postulates that doubling L at constant relative commodity prices: a. doubles the output of the L—intensive commodity b. reduces the output of the Krintensive commodity c. increases the output of both commodities d. any of the above 4. International labor movements induce: a. increase of real wage rate b. decrease of real wage rate c. convergence of real wage d. one cannot say 5. The production efficiency loss from an export subsidy is larger if a. supply is more elastic; b. demand is more elastic; c. supply is less elastic; d. demand is less elastic. 6. If the foreign price of a product is 500 and that of its inputs is 100, what tariff should the government impose to inputs if they want to give an effective rate of protection of 50% to producers of the final product when the final product is facing a 40% tariff? a. 50% b. 40% c. 38.75% d. 20% e. 0% 7. A trade-creating customs union is where: a.lower—cost imports from outside the customs union are replaced by higher-cost imports from a union member b.some domestic production in a member nation is replaced by lower-cost imports form another member nation c.trade among members increases but trade with nonmembers decreases d.trade among members decreases while trade with non members increases 10/05/2000 THU 17:40 FAX 6434330 MOFFITT LIBRARY 002 8. The most-favored-nation (MFN) principle refers to: a. extension to all trade partners with MNF status of any reciprocal tariff reduction negotiated by the U.S. with any of its trade partners b. multilateral trade negotiation c. the General Agreement on Tariffs and Trade (1. the International Trade Organization c. rules on the creation of trade blocs Answers all the following short-answer questions 9 to 20 (3-4 sentences and/or graphs) (3 points each) 9. Suppose 2 countries, Home and Foreign, have the following unit labor requirements: ah = 2, aly =4 , a?x = 12 and afy = 6, where * denotes the foreign country. If prices after trade are Px=3 and P5,: 2 (and there is perfect competition and labor is the only input), what is the value of w*fw ? 10. What is the economic definition of dumping? Why is dumping undertaken? What are the conditions required to make dumping possible? Show on a graph how prices and quantities on the domestic and the foreign markets are determined. 11. Which of these two pay-off matrices represents the case of a trade-war? Explain why it represents a trade war (a) (b) Japan Japan U.S. Free trade Protection U.S. Free trade Protection Free trade 140 l 90 120 I llO Free trade 140 I 90 80/ 120 Protection 150/ 60 90 l 80 Protection 180/ 40 90 / 6O (note: the payoff pair written xly in the table above is to be read as payoff-x to the U.S. and payoff y to Japan) 12. Using graphs, show the effect of a large country’s export-biased growth on production possibilities, terms of trade, and consumption possibilities. 13. In our model of intertemporal trade, what do countries exchange? What differences in their intertemporal PPFs make this exchange mutually beneficial? 14. Define agglomeration economies, and give an example. Explain how agglomeration economics induce uneven development of regions which a priori had similar endowments and possibilities of developing. 15. Using offer curves, show a situation of free trade between two large countries, followed by one country's imposition of a tariff on its imports, followed by the other country’s retaliation. (Specify clearly what is represented on each axis). Indicate the changes in (1) the terms of trade, (2) the volume of trade, and (3) welfare in the two countries. 16. According to Krugman, in his article “The Move Toward Free Trade Zones”, what are the potential negative " effects of preferential agreements? 17. Describe the long-term general trend and degree of short-term stability in the relative prices of primary products. Cite two reasons that explains this trend. 18. Describe briefly the conditions required to justify the support of an infant industry. Cite two reasons why some infant industries actually never grow up. 19. How is NAFTA expected to change the flow of factor movements between Mexico and the United States? Distinguish between short—run and long-run effects. 20. Some poor countries are importing pollution (such as waste materials) from richer countries in return for payment. a. Explain why such Lrade takes place and why there are gains from trade. b. Give 2 arguments against free trade of pollution. 10/05/2000 THU 17:40 FAX 6434330 MOFFITT LIBRARY Answer numerical problems 21 and 22 (13 points each): 21. Country A’s demand for wheat is D = 30 — p, and its supply for wheat is S a p - 10. The world market price for wheat is $15/unit. Assume that A is a small country. a. Solve for the autarkic price and production levels. in. If there is free trade, how much wheat does A trade with the rest of the world? 0. Now suppose that the government provides a $2/unit production subsidy. Draw a graph showing the impact of the intervention. How much wheat does country A trade with the rest of the world now? By how much have consumer surplus and producer surplus changed? What is the cost of the subsidy to the government? d. Suppose that the government adds to the previous intervention 3 $3/unit consumption subsidy. Graph this double—intervention policy. Label clearly the production and consumption levels, both before and after this double intervention. By how much have consumer surplus and producer surplus changed compared to the free trade case? What is the cost to government? What is the net social gain/loss of this double intervention? 22. Heckscher—Ohlin theorem Suppose that the production of each ton of cloth requires 2 units of labor and 5 units of capital, and each ton of food requires 4 labor units and 1 capital units. 21. England had 100 units of labor and 115 units of capital. Portugal has 100 units of labor and 70 units of capital. Calculate the output levels of cloth and food in the two countries in autarky compatible with tail employment of L and K. b Assume that, with international trade, the price of cloth is 6 and the price of food is 2. Finally, assume that, when confronted with the same relative prices, consumption is in the same proportion in the two countries. Determine how much of each good is traded between the two countries. c. State the Heckscher—Ohlin theorem on the determinants of comparative advantage, paying due attention to the assumptions made for the theorem to hold. d Is it verified by your results? Answer 2 of the following 3 essay questions 23, 24 , and 25 (13 points each): 23. Political economy of free trade We know from theoretical principles that barriers to trade create, in most instances, welfare losses. Yet, the Multifiber Agreement is still in place, and in the Uruguay Round negotiations showed strong resistance to its elimination. Analyze the political economy of this resistance to free trade in the textile industry in the United States. 21. Briefly state what the Multifiber Agreement refers to and its implications for the United States. b. Identify the different actors involved, and analyze the effects that a liberalization of textile imports would have on them c. Explain why the textile industry has been successful in resisting trade liberalization. d. What would you recommend to facilitate acceptation of the liberalization of textile imports? 24. New protectionism Although international negotiations have achieved important steps toward free trade, governments’ creativity in coming up with new ways to discriminate against imports is impressive. Give 4 examples of these new forms of protectionism. In each case: 21. Give specific examples of commodities restricted by these rules. b. Explain why these new trade barriers are legal under GATT. c. Discuss why they may in some cases be legitimate to serve efficiency or social objectives and in others serve as disguised trade barriers. 26. Strategic Trade Many countries have heard of successful outcomes of strategic trade policy and want to engage into this type of policy. 21. Use an exzunple to illustrate the Brande: and Spencer analysis of strategic trade. b. Clearly identify the conditions that must hold in the industry to consider a strategic trade policy b. What instrument is used? Give the pay-off matrices before and after the policy. d. Discuss the conditions for success (where success is defined as elimination of the competitor) and the consequences to be expected if the policy is not successful. 3 003 ...
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This note was uploaded on 08/28/2009 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at Berkeley.

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