Economics 452 International Trade Theory and Policy Fall 2013

Transcription

1 Name FIRST EXAM Economics 452 International Trade Theory and Policy Fall 2013 WORLD TRADE 1. Approximately what percent of all world production of goods and services is exported to other countries? a. 5% b. 30% c. 60% d. 90% e. 100% 2. Since the period following World War II (the early 1950s), the proportion of most countries products that are exported has a. Steadily decreased b. Remained constant c. Tended to increase d. Increased slightly then decreased over recent decades e. Fluctuated widely with no clear trend 3. Since the period following World War II (the early 1950s), the proportion of imported goods in the mix of what an average person in the United States consumes has a. Steadily decreased b. Remained constant c. Tended to increase d. Increased slightly then decreased over recent decades e. Fluctuated widely with no clear trend 4. For 2012, the trade volume of the United States with was 556 billion U.S. dollars. a. Canada b. China c. Mexico d. Japan e. United Kingdom -1-

2 5. Why does the United States trade a lot with Ireland? a. Multinational corporations b. Historical ties c. Cultural and linguistic ties d. Shared border e. Reasons a, b and c 6. Which of the following would be best explained by the gravity model? That the United States a. Exports of transportation equipment total 258 billion U.S. dollars b. Imports of energy related products total 431 billion U.S. dollars c. Runs a 321 billion U.S. dollar trade deficit with China d. Runs a 5.5 billion U.S. dollar trade surplus with Brazil e. Trades more with Mexico than with Japan and Germany combined 7. The main reason that the United States trades more with Canada and Mexico than with the United Kingdom and Germany is: a. Canada and Mexico have higher GDPs that the United Kingdom and Germany b. The United Kingdom and Germany have higher GDPs than Canada and Mexico c. Canada and Mexico are closer to the United States than the United Kingdom and Germany d. The United Kingdom and Germany are closer to the United States than Canada and Mexico e. None of the above because the United States trades more with the United Kingdom and Germany than with Canada and Mexico 8. More than half of all world trade involves a. Agriculture b. Fuels and Mining c. Manufactures d. Services e. Non-traded goods -2-

3 RICARDIAN MODEL Staplers and paper are produced with labor. Under free trade, the wage paid in producing paper exceeds the wage paid in producing staplers in Canada. 9. Canada must have comparative advantage in a. Paper b. Staplers c. Paper and staplers d. Neither paper nor staplers e. Cannot tell from the information provided 10. As Canada opens up to free trade (starting from autarky), a. All workers making staplers will switch to making paper b. Some making staplers will switch to making paper c. No workers will move between sectors d. Some making paper will switch to making staplers e. All workers making paper will switch to making staplers 11. Canada must have a lower than the rest of the world. a. Opportunity cost of staplers in terms of paper b. Opportunity cost of paper in terms of staplers c. Unit labor requirement in staplers d. Unit labor requirement in paper e. Productivity of labor 12. Under free trade Canada produces a. Only paper b. Only staplers c. Paper for sure and possibly staplers d. Staplers for sure and possibly paper e. Cannot tell from the information provided -3-

4 13-16 Cars and spices are produced with labor. Prior to trade, the relative price of cars to spices is different in India than in Korea. When India and Korea (the only two countries) engage in free trade, the relative price of cars to spices equal s India s opportunity cost of cars in terms of spices. 13. India exports a. Only spices b. Only cars c. Both cars and spices d. Only cars or only spices e. Neither cars nor spices 14. Korea exports a. Only spices b. Only cars c. Both cars and spices d. Only cars or only spices e. Neither cars nor spices 15. Does India gain from trade? a. Yes, India is definitely better off with trade than without b. No, India is indifferent between trading and not trading c. No, India is definitely worse off with trade than without d. Maybe, as India would gain from trade if exports spices e. Maybe, as India would gain from trade if exports cars 16. Does Korea gain from trade? a. Yes, Korea is definitely better off with trade than without b. No, Korea is indifferent between trading and not trading c. No, Korea is definitely worse off with trade than without d. Maybe, as Korea would gain from trade if exports spices e. Maybe, as Korea would gain from trade if exports cars -4-

5 PROBLEMS (Ricardian Model) In the United States (US), producing one pound of cheese requires two hours of labor, while producing one gallon of wine requires one hour of labor. In the rest of the world (ROW), producing one pound of cheese requires six hours of labor, while producing one gallon of wine requires one hour of labor. The United States has 300 hours of labor and the ROW has 450 hours of labor. World relative demand for cheese to wine is 1. Construct the US production possibilities frontier (all three forms). Determine the US maximum production of cheese and of wine. What is the US opportunity cost of cheese in terms of wine and its interpretation? Where does it appear in the equation describing production possibilities? Draw graph of US production possibilities frontier here: 0-5-

6 2. Construct the ROW production possibilities frontier (all three forms). Determine the ROW maximum production of cheese and of wine. What is the ROW opportunity cost of cheese in terms of wine? Compare the slopes of the two production possibilities frontiers which is flatter and why? Draw graph of the ROW production possibilities frontier here: 0 3. What is the world relative supply of cheese to wine if each country produces only its comparative advantage good? -6-

7 Construct world relative supply and world relative demand. Find the relative price of cheese in terms of wine under free trade. What is its interpretation? Draw graph of world relative supply and world relative demand here: 0 4. Determine the optimal production bundle for each country under free trade - how much does each country produce of each good? Determine the pattern of trade - what does each country import and export? Determine whether each country gains from trade and explain the source of any gains from trade. -7-

8 5. Construct the US trade possibilities frontier (all three forms). Determine the US maximum consumption of cheese and of wine under free trade. Where does the free trade relative price of cheese in terms of wine appear in the equation describing trade possibilities? Draw graph of US trade possibilities frontier on the PPF graph. 6. Construct the ROW trade possibilities frontier (all three forms). Determine the ROW maximum consumption of cheese and of wine under free trade. Compare the slopes of the two trade possibilities frontiers and explain. Draw graph of ROW trade possibilities frontier on the PPF graph. On my honor as an Aggie, I have neither given nor received unauthorized aid on this exam. Signature -8-

9 FIRST EXAM SOLUTIONS Economics 452 International Trade Theory and Policy Fall 2013 MULTIPLE CHOICE 1b Approximately 30% of all world production of goods and services is exported to other countries. 2c Since the period following World War II (the early 1950s), the proportion of most countries products that are exported has tended to increase. 3c Since the period following World War II (the early 1950s), the proportion of imported goods in the mix of what an average person in the United States consumes has tended to increase. 4a For 2012, the trade volume of the United States with Canada was 556 billion U.S. dollars. 5e 6e 7c 8c 9a 10a 11b 12a Multinational corporations, historical ties, and cultural and linguistic ties are all reasons why the United States trades a lot with Ireland. That the United States trades more with Mexico than with Japan and Germany combined would be best explained by the gravity model as bilateral trade volumes depend on the size of countries and the distance between them. The main reason that the United States trades more with Canada and Mexico than with the United Kingdom and Germany is: Canada and Mexico are closer to the United States than the United Kingdom and Germany. More than half of all world trade involves manufactures. Canada must have comparative advantage in paper. As Canada opens up to free trade (starting from autarky), all workers making staplers will switch to making paper. Canada must have a lower opportunity cost of paper in terms of staplers than the rest of the world. Under free trade Canada produces only paper. 13d India exports only cars or only spices (comparative advantage good). 14d Korea exports only cars or only spices. 15b No, India is indifferent between trading and not trading. 16a Yes, Korea is definitely better off with trade than without.

10 PROBLEMS (Ricardian Model) In the United States (US), producing one pound of cheese requires two hours of labor, while producing one gallon of wine requires one hour of labor. In the rest of the world (ROW), producing one pound of cheese requires six hours of labor, while producing one gallon of wine requires one hour of labor. The United States has 300 hours of labor and the ROW has 450 hours of labor. World relative demand for cheese to wine is 1. Construct the production possibilities frontier for the United States Determine the US maximum production of cheese and of wine. What is the US opportunity cost of cheese in terms of wine and its interpretation? To make a pound of cheese, must stop producing two gallons of wine. Where does it appear in the equation describing production possibilities? Absolute value of slope [GRAPH OF PRODUCTION POSSIBILITIES FRONTIER: horizontal axis labeled cheese, vertical axis labeled wine; cheese endpoint 150; wine endpoint 300; PPF label]

11 2. Construct the production possibilities frontier for the ROW. Determine the ROW maximum production of cheese and of wine. What is the ROW opportunity cost of cheese in terms of wine? Compare the slopes of the two production possibilities frontiers which is flatter and why? US production possibilities frontier flatter due to lower opportunity cost of cheese in terms of wine. [GRAPH OF PRODUCTION POSSIBILITIES FRONTIER*: horizontal axis labeled cheese, vertical axis labeled wine; cheese endpoint 75; wine endpoint 450; PPF* label] 3. What is the world relative supply of cheese to wine if each country produces only its comparative advantage good?

12 Construct world relative supply and world relative demand. P C/PW RD = P W/PC RS 2 1/2 < 1/3 3 1/3 1/3 6 1/6 > 1/3 Find the relative price of cheese in terms of wine under free trade. What is its interpretation? A pound of cheese sells for 3 gallons of wine. [GRAPH OF RELATIVE DEMAND AND RELATIVE SUPPLY: horizontal axis labeled relative quantity of cheese (to wine), vertical axis labeled relative price of cheese (to wine); first step at 2 with RD=1/2, second step at 6 with RD=1/6; jump at 1/3 with free trade relative price 3; RD and RS labels] 4. Determine the optimal production bundle for each country under free trade. Determine the pattern of trade - what does each country import and export? The United States exports cheese and imports wine; ROW exports wine and imports cheese. Determine whether each country gains from trade and explain the source of any gains from trade. Both countries gain from trade as the free trade relative price differs from both opportunity costs (and from both autarky relative prices). [Buying a pound of cheese for 3 gallons of wine with trade is cheaper than for foreign to stop producing 6 gallons of wine to make a pound of cheese. Buying a gallon of wine for 1/3 pound of cheese is cheaper than for home to stop producing 1/2 pound of cheese to make a gallon of wine.]

13 5. Construct the trade possibilities frontier for the US. Determine the US maximum consumption of cheese and of wine under free trade. Where does the free trade relative price of cheese in terms of wine appear in the equation describing trade possibilities? Absolute value of slope [GRAPH OF TRADE POSSIBILITIES FRONTIER: cheese endpoint 150; wine endpoint 450; TPF label; position of TPF outside PPF] 6. Construct the trade possibilities frontier for the ROW. Determine the ROW maximum consumption of cheese and of wine under free trade. Compare the slopes of the two trade possibilities frontiers and explain. Same as the two countries face same relative price under free trade [GRAPH OF TRADE POSSIBILITIES FRONTIER*: cheese endpoint 150; wine endpoint 450; TPF* label; position of TPF* outside PPF*]

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