Name FIRST MIDTERM EXAM Economics 452 International Trade Theory and Policy Fall 2010 WORLD TRADE 1. Which of the following is NOT one of the three largest trading partners of the United States? a. China b. Mexico c. Saudi Arabia d. Canada e. b and c 2. That US imports from China are $338 billion while exports from the United States to China are only $67 billion is called what? a. Trade balance positive so a trade surplus b. Trade balance negative so a trade deficit c. Trade balance even so neither a trade surplus nor deficit d. Both a trade deficit and surplus e. Balance of payments surplus 3. About 68% of Texas imports come from and about 32% of Texas exports go to which country? a. China b. Mexico c. Canada d. Venezuela e. Saudi Arabia 4. If Texas were a nation, it would rank in the exporters. a. Top 5 b. Top 10 c. Top 20 d. Top 100 e. Top 200-1-
5. On the graph of country shares of EU trade with the United States versus their shares of EU gross domestic product (GDP), when add Mexico and Canada, where do they appear? a. Both are below the line for the EU countries b. Both are quite near the line for the EU countries c. Both are above the line for the EU countries d. Mexico is above the line and Canada below e. Canada is above the line and Mexico below 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. Which statement about trade as a percentage of GDP with British Columbia (BC) is FALSE? a. Alberta trades more with BC than Washington b. Saskatchewan trades more with BC than Montana c. Manitoba trades more with BC than California d. Ohio trades more with BC than Ontario e. Quebec trades more with BC than New York 8. What brought the first wave of globalization to an end? a. Revolutionary War b. Civil War c. World War I d. Korean War e. Vietnam War -2-
RICARDIAN MODEL 9-12. Chairs and tables are produced with labor. Suppose when move from autarky to free trade, the relative price of tables to chairs rises in Italy. 9. The relative price of chairs to tables in the absence of trade must be in Italy compared to France. a. Higher b. Lower c. The same d. Higher or the same e. Lower or the same 10. France has comparative advantage in a. Only tables b. Only chairs c. Both tables and chairs d. Neither tables nor chairs e. Cannot tell from the information provided 11. Italy exports a. Only tables b. Only chairs c. Both tables and chairs d. Neither tables nor chairs e. Cannot tell from the information provided 12. If France has a better technology than Italy for both goods, the wage in France will be the wage in Italy under free trade. a. Higher than b. The same as c. Lower than d. The same as or lower than e. Cannot tell from the information provided -3-
13-16 Japan and Taiwan engage in free trade in pens and paper, which are produced with labor. Suppose under free trade that the wage in making pens is less than the wage in making paper in Taiwan. 13. What does Japan produce under free trade? a. Only pens b. Only paper c. Definitely pens and maybe paper d. Definitely paper and maybe pens e. Definitely both pens and paper 14. In Taiwan, the free trade relative price of pens to paper must be its opportunity cost of pens to paper. a. More than b. Equal to c. Less than d. More than or equal to e. Cannot tell from the information provided 15. Does Japan strictly gain from trade? a. Definitely yes b. Definitely no c. Possibly, but only if produces just paper d. Possibly, but only if produces just pens e. Possibly, but only if produces both goods 16. When Taiwan opens up to free trade (from autarky), a. All workers making paper will move to making pens b. Some or all workers making paper will move to making pens c. All workers making pens will move to making paper d. Some or all workers making pens will move to making paper e. Workers will not move between the sectors -4-
PROBLEMS (Ricardian Model) In the United States (US), producing one pound of cheese requires three 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 ten hours of labor, while producing one gallon of wine requires two hours of labor. The United States has 150 hours of labor and the ROW has 400 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? 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 Fall 2010 MULTIPLE CHOICE 1c 2b 3b 4c 5c 6d 7d 8c 9a 10b 11a 12a 13c 14c 15d 16c Saudi Arabia is NOT one of the three largest trading partners of the United States. That US imports from China are $338 billion while exports from the United States to China are only $67 billion is called trade balance negative so a trade deficit. About 68% of Texas imports come from and about 32% of Texas exports go to Mexico. If Texas were a nation, it would rank in the top 20 exporters. On the graph of country shares of EU trade with the United States versus their shares of EU gross domestic product (GDP), Mexico and Canada both appear above the line for the EU countries. The United States trades more with countries that are closer in distance. With trade measured as a percentage of GDP, false that Ohio trades more with British Columbia than Ontario. World War I brought the first wave of globalization to an end. The relative price of chairs to tables in the absence of trade must be higher in Italy compared to France. France has comparative advantage in only chairs. Italy exports only tables. If France has a better technology than Italy for both goods, the wage in France will be higher than the wage in Italy under free trade. Japan produces definitely pens and maybe paper under free trade. In Taiwan, the free trade relative price of pens to paper must be less than its opportunity cost of pens to paper. Japan possibly gains from trade but only if produces just pens. When Taiwan opens up to free trade (from autarky), all workers making pens will move to making paper.
PROBLEMS (Ricardian Model) In the United States (US), producing one pound of cheese requires three 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 ten hours of labor, while producing one gallon of wine requires two hours of labor. The United States has 150 hours of labor and the ROW has 400 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? 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 50; wine endpoint 150; 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; wine endpoint 200; 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 3 1/3 <1/4 4 1/4 1/4 5 1/5 >1/4 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 3, second step at 5; jump at 1/4 and free trade relative price 4; other two points on RD (3,1/3) and (5,1/5); RD label, RS label 4. Determine the optimal production bundle for each country under free trade. And 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 4 gallons of wine with trade is cheaper for foreign than the five gallons of wine that must stop producing to make a pound of cheese. Buying a gallon of wine for 1/4 pound of cheese is cheaper for home than the 1/3 gallon of wine that must stop producing to make a gallon of wine.
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 50; wine endpoint 200; 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 50; wine endpoint 200; TPF* label; position of TPF* outside PPF*