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Unformatted text preview: ECON 4431V: International Trade Spring 2005 Problem Set 3 Due April 13th, Wednesday NOTE: All assignments must be typed. Graphs and calculations may be handwritten. No late homeworks will be accepted. Exercise 1 (20 points) Standard Trade Model: Transfer of Income We showed in class how an export-biased growth of an under-developed country might lead to an immiserizing growth. This question deals with international transfers that might lead to a similar outcome as the immiserizing growth. In practice, a lot of foreign direct aid is ‘tied’; that is, the donor country will impose contingency on the aid by restricting the recipient country to spend the aid on goods produced by the donor country. For example, France may provide aid to African countries to build a hospital but require that they buy only French medical equipment. So let’s formalize this set-up by assuming two countries( F rance and G abon), two goods ( M edical equipment and C offee), and two factors. France provides direct foreign aid to Gabon, but restricts the usage of the aid such that eighty percent of the money must be spent on buying French medical equipment. The rest is spent on consuming coffee. For France, the marginal propensity to consume on medical equipment and coffee are 0.5, respectively. (i) Draw a regular production possibility frontier for Gabon assuming that Gabon exports coffee and imports medical equipment. Put coffee in the horizontal axis and medical equipment in the vertical axis. Indicate in the graph the point of consumption and production. (ii) Suppose France provides direct aid of $1 million to Gabon. How much less would France spend on medical equipment? on coffee? How much more would Gabon (have to) spend on medical equipment? on coffee? What would happen to the world demand of medical equipment? world demand of coffee?...
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- Spring '11
- Economics, Medical equipment, Gabon