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ECON231_Assignment4_F11_Sol_Full

# ECON231_Assignment4_F11_Sol_Full - ECON 231 Section 2...

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Page 1 of 21 Pages ECON 231 – Section 2 Introduction to International Economics Instructor: Sharif F. Khan Department of Economics University of Waterloo Fall 2011 Suggested Solutions to Assignment 4 (Optional) Part B Short Questions B1. Question # 5 of Ch 8 (8 th ed. of the textbook) Or, Question # 5 of Ch 9 (9 th ed. of the textbook) Word price of bicycles = \$200 World price of bike components = \$100 The value added without trade distortions, W V , is (\$200-\$100) = \$100 With a 50% tariff on bicycles, the domestic price of bicycles in China = \$200*1.5 = \$300. There is no tariff on bike components. So, the value added in the presence of trade policies, T V , is (\$300-\$100) = \$200 Therefore, the effective rate of protection on bicycles in china is equal to: %. 100 100 100 100 200 100 = × - = × - W W T V V V B2. Question # 6 of Ch 8 (8 th ed. of the textbook) Or, Question # 6 of Ch 9 (9 th ed. of the textbook) The effective rate of protection takes into consideration the costs of imported intermediate goods. Here, 55% of the cost can be imported, suggesting with no distortion, home value added would be 45%. A 15% increase in the price of ethanol, though, means home value added could be as high as 60%. Effective rate of protection = ( V t - V w )/ V w , where V t is the value added in the presence of trade policies, and V w is the value added without trade distortions. In this case, we have (60 - 45)/45 = 33% effective rate of protection.

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Page 2 of 21 Pages B3. Question # 10 of Ch 8 (8 th ed. of the textbook) Or, Question # 10 of Ch 9 (9 th ed. of the textbook) The reason is largely that the benefits of these policies accrue to a small group of people and the costs are spread out over many people. Thus, those that benefit care far more deeply about these policies. These typical political economy problems associated with trade policy are probably even more troublesome in agriculture, where there are long standing cultural reasons for farmers and farming communities to want to hold onto their way of life, making the interests even more entrenched than they would normally be. B4. Question # 11 of Ch 8 (8 th ed. of the textbook) Or, Question # 11 of Ch 9 (9 th ed. of the textbook) It would improve the income distribution within the economy since wages in manufacturing would increase, and real incomes for others in the economy would decrease due to higher prices for manufactured goods. This is true only under the assumption that manufacturing wages are lower than all others in the economy. If they were higher than others in the economy, the tariff policies would worsen the income distribution.
Page 3 of 21 Pages C1. Question # 1, 2, 3, 4 and 7 of Ch 8 (8 th ed. of the textbook) Or, Question # 1, 2, 3, 4 and 7 of Ch 8 (8 th ed. of the textbook) 1. It is given that Home’s demand and supply curves for wheat are respectively P D 20 100 - = P S 20 20 + = . Home’s import demand equation,

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ECON231_Assignment4_F11_Sol_Full - ECON 231 Section 2...

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