Name FIRST MIDTERM EXAM Economics 452 International Trade Theory and Policy Spring 2010 WORLD TRADE 1. Which of the following is NOT one of the five largest trading partners of the United States? a. China b. Mexico c. Germany d. Italy e. Japan 2. What is true for the United States with each of its five largest trading partners? a. Trade balance is positive so we have a trade surplus b. Trade balance negative so we have a trade deficit c. Value of our imports exceeds the value of our exports d. Value of our exports exceeds the value of our imports e. b and c 3. Which of the following countries is NOT in the top 10 countries of origin for Texas imports? a. China b. Mexico c. Canada d. Venezuela e. Saudi Arabia 4. Which state exports the most (biggest dollar amount)? a. Alaska b. Texas c. California d. Florida e. New York -1-
5. Germany has a larger share of EU gross domestic product (GDP) than Spain so it should have share of EU trade with the United States than Spain. a. A larger b. A smaller c. An equal d. An equal or larger e. An equal or smaller 6. The United States trades more with countries that a. Have minimal cultural ties b. Are smaller in terms of their GDP c. Have few ocean harbors and lots of mountain ranges d. Are closer in distance e. b and d 7. To illustrate that borders matter, we saw that British Columbia trades far more as a share of GDP with Canadian provinces than with U.S. states that are a. Further away b. Similar distance away c. Closer d. Richer e. Bigger 8. Trade as a percentage of GDP for the United States in 1996 is for the United Kingdom in 1910. a. Much larger than b. Slightly larger than c. Smaller than d. Same as e. None of the above such a comparison is not meaningful -2-
RICARDIAN MODEL 9-12. Ice skates and trash cans are produced with labor. Suppose the free trade relative price of ice skates to trash cans is less than the opportunity cost of ice skates in terms of trash cans in Canada. 9. The relative price of ice skates to trash cans in the absence of trade must be in Canada compared to China. a. Higher b. Lower c. The same d. Higher or the same e. Lower or the same 10. Canada has comparative advantage in a. Only trash cans b. Only ice skates c. Both trash cans and ice skates d. Neither trash cans nor ice skates e. Cannot tell from the information provided 11. Canada has absolute advantage in a. Only trash cans b. Only ice skates c. Both trash cans and ice skates d. Neither trash cans nor ice skates e. Cannot tell from the information provided 12. In Canada, which sector pays the highest wage under free trade? Wage making a. Ice skates will be higher than for trash cans b. Trash cans will be higher than for ice skates c. Ice skates will be same as for trash cans d. Ice skates will be equal or higher than for trash cans e. Trash cans will be equal or higher than for ice skates -3-
13-16 The United Kingdom and Russia engage in free trade in wallpaper and paint, which are produced with labor. Suppose under free trade that the wage in making paint exceeds the wage in making wallpaper in Russia. 13. What does the United Kingdom produce under free trade? a. Only paint b. Only wallpaper c. Definitely paint and maybe wallpaper d. Definitely wallpaper and maybe paint e. Definitely both paint and wallpaper 14. What does the United Kingdom export? a. Only paint b. Only wallpaper c. Definitely paint and maybe wallpaper d. Definitely wallpaper and maybe paint e. Definitely both paint and wallpaper 15. Does the United Kingdom strictly gain from trade? a. Definitely yes b. Definitely no c. Possibly, but only if produces just wallpaper d. Possibly, but only if produces just paint e. Possibly, but only if produces both goods 16. When the United Kingdom opens up to free trade (from autarky), a. All workers making wallpaper will move to making paint b. Some or all workers making wallpaper will move to making paint c. All workers making paint will move to making wallpaper d. Some or all workers making paint will move to making wallpaper e. Workers will not move between the sectors -4-
PROBLEMS (Ricardian Model) In the United States (US), producing one pound of cheese requires one unit of labor, while producing one gallon of wine requires two units of labor. In the rest of the world (ROW), producing one pound of cheese requires three units of labor, while producing one gallon of wine requires two units of labor. The United States has 20 units of labor and the ROW has 40 units 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? Where does it appear in the equation describing production possibilities? Draw graph of US production possibilities frontier here: 0-5-
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-
Construct world relative supply and world relative demand. Find the relative price of cheese in terms of wine under free trade. Draw graph of world relative supply and world relative demand here: 0 4. Determine the optimal production bundle for each country under free trade. 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-
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-
FIRST MIDTERM EXAM SOLUTIONS Economics 452 International Trade Theory and Policy Spring 2010 MULTIPLE CHOICE 1d 2e 3c 4b 5a 6d 7b 8c 9a 10a 11e 12b 13d 14b 15c 16d Italy is NOT one of the five largest trading partners of the United States. Trade balance negative so we have a trade deficit AND the value of our imports exceeds the value of our exports for the United States with each of its five largest trading partners. Canada is NOT in the top 10 countries of origin for Texas imports. Texas exports the most (biggest dollar amount) of any US state. Germany has a larger share of EU gross domestic product (GDP) than Spain so it should have a larger share of EU trade with the United States than Spain. The United States trades more with countries that are closer in distance. To illustrate that borders matter, we saw that British Columbia trades far more as a share of GDP with Canadian provinces than with U.S. states that are a similar distance away. Trade as a percentage of GDP for the United States in 1996 is smaller than for the United Kingdom in 1910. The relative price of ice skates to trash cans in the absence of trade must be higher in Canada compared to China. Canada has a comparative advantage in only trash cans. Cannot tell from the information provided whether Canada has an absolute advantage in any of the goods. Wage making trash cans will be higher than for ice skates in Canada under free trade. UK produces definitely wall paper and maybe paint under free trade. The United Kingdom exports only wallpaper. The United Kingdom gains from trade only if produces just wallpaper. When the United Kingdom opens up to free trade (from autarky), some or all workers making paint will move to making wallpaper.
PROBLEMS (Ricardian Model) In the United States (US), producing one pound of cheese requires one unit of labor, while producing one gallon of wine requires two units of labor. In the rest of the world (ROW), producing one pound of cheese requires three units of labor, while producing one gallon of wine requires two units of labor. The United States has 20 units of labor and the ROW has 40 units 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? 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 20; wine endpoint 10; PPF label.
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 40/3=13.3; wine endpoint 20; PPF* label 3. What is the world relative supply of cheese to wine if each country produces only its comparative advantage good?
Construct world relative supply and world relative demand. P C/PW RD = P W/PC RS 1/2=0.5 2 0.. 1 1 1 1 3/2=1.5 2/3=0.67 1.. Find the relative price of cheese in terms of wine under free trade. 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 1/2=0.5, second step at 3/2=1.5; jump at 1 and free trade relative price 1; other two points on RD (1/2,2) and (3/2=1.5,2/3=0.67); RD label, RS label 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.
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 20; wine endpoint 20; 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 20; wine endpoint 20; TPF* label; position of TPF* outside PPF*