Name FIRST EXAM Economics 452 International Trade Theory and Policy Fall 2012 WORLD TRADE 1. The United States trades (exports plus imports) the third most with a. China b. Canada c. France d. Mexico e. Japan 2. In 2011, U.S. imports from China were around, and U.S. exports to China were around. a. $398 million, $97 million b. $97 million, $398 million c. $398 billion, $97 million d. $398 billion, $97 billion e. $97 billion, $398 billion 3. From 2009 to 2010, Texas exports, and then from 2010 to 2011. a. Fell 27%, fell 21% b. Rose 27%, fell 21% c. Fell 27%, rose 21% d. Rose 27%, rose 21% e. Rose 27%, stayed roughly unchanged 4. From 2009 to 2010, U.S. exports, and then from 2010 to 2011. a. Fell 21%, fell 16% b. Rose 21%, fell 16% c. Fell 21%, rose 16% d. Rose 21%, rose 16% e. Rose 21%, stayed roughly unchanged -1-
5. According to the gravity model, a simple reason why the United States trades more with Germany, the United Kingdom and France than with other European countries such as Italy, Ireland and Belgium is that the first three countries are larger in terms of a. Land mass b. Capital stock c. Population d. Gross domestic product (GDP) e. Both a and b 6. That U.S. trade with Canada is many times larger than U.S. trade with a European country of similar size (such as Spain) is due to: a. Canada being closer to the United States than Europe is b. Majority of Canadians living near the US border c. Canadian-US Free trade agreement promoting trade d. Sharing a common language and heritage e. All of the above 7. Agricultural products currently account for about of the volume of world trade. a. 2% b. 7% c. 17% d. 32% e. 55% 8. As of 1998, world exports as a share of would output was around a. 2% b. 7% c. 17% d. 32% e. 55% -2-
RICARDIAN MODEL 9-12. Cheese and potatoes are produced with labor. Under free trade, the relative price of cheese to potatoes equals what the relative price was in the United States prior to trade, and is higher than what the relative price was in the rest of the world prior to trade. 9. Under free trade, in the rest of the world, the wage earned when making cheese must be the wage earned when making potatoes. a. Higher than b. Lower than c. The same as d. Higher than or the same as e. Lower than or the same as 10. When the rest of the world opens up to free trade (from autarky), a. All workers making cheese will switch to making potatoes b. Some making cheese will switch to making potatoes c. No workers will move between sectors d. Some making potatoes will switch to making cheese e. All workers making potatoes will switch to making cheese 11. When the United States opens up to free trade (from autarky), a. All workers making cheese will switch to making potatoes b. Some making cheese will switch to making potatoes c. No workers will move between sectors d. Some making potatoes will switch to making cheese e. All workers making potatoes will switch to making cheese 12. The United States must have a lower than the rest of the world. a. Opportunity cost of cheese in terms of potatoes b. Opportunity cost of potatoes in terms of cheese c. Unit labor requirement in cheese d. Unit labor requirement in potatoes e. Productivity of labor -3-
13-16 Cement and solar panels are produced with labor. Suppose that under free trade China exports solar panels and imports cement from the rest of the world. 13. Does the rest of the world gain from trade? a. Yes for sure b. No for sure c. Possibly but only if produces just solar panels d. Possibly but only if produces just cement e. Possibly but only if produces both solar panels and cement 14. Does China gain from trade? a. Yes for sure b. No for sure c. Possibly but only if produces just solar panels d. Possibly but only if produces just cement e. Possibly but only if produces both solar panels and cement 15. A country gains from trade provided that, and to the extent that, the free trade relative price of cement to solar panels differs from the country s a. Relative price of cement to solar panels in autarky b. Opportunity cost of cement in terms of solar panels c. Unit labor requirement in making cement d. Unit labor requirement in making solar panels e. a) and b) 16. Is production efficient under free trade? a. Definitely yes because at least one country always produces only its comparative advantage good b. Definitely yes because both countries always produce both goods c. Definitely no because both countries always produce both goods d. Possibly, but only if at least one country produces only its comparative advantage good e. Possibly, but only if both countries produce both goods -4-
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 9 hours of labor, while producing one gallon of wine requires one hour of labor. The United States has 360 hours of labor and the ROW has 1260 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-
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. 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-
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 EXAM SOLUTIONS Economics 452 International Trade Theory and Policy Fall 2012 MULTIPLE CHOICE 1d The United States trades the third most with Mexico. 2d In 2011, U.S. imports from China were around $398 billion, and U.S. exports to China were around $97 billion. 3d From 2009-2010, Texas exports rose, and then rose from 2010-2011. 4d From 2009-2010, U.S. exports rose, and then rose from 2010-2011. 5d According to the gravity model, a simple reason why the United States trades more with Germany, the United Kingdom and France than with other European countries such as Italy, Ireland and Belgium is that the first three countries are larger in terms of gross domestic product (GDP). 6e That U.S. trade with Canada is many times larger than U.S. trade with a European country of similar size (such as Spain) is due to all of the above. 7b Agricultural products currently account for about 7% of the volume of world trade. 8c As of 1998, world exports as a share of would output was 17%. 9a Under free trade, in the rest of the world, the wage earned when making cheese must be higher than the wage earned when making potatoes. 10e When the rest of the world opens up to free trade (from autarky), all workers making potatoes will switch to making cheese. 11b When the United States opens up to free trade (from autarky), some workers making cheese will switch to making potatoes. 12b The United States must have a lower opportunity cost of potatoes in terms of cheese than the rest of the world. 13d The rest of the world gain from trade only if produces just cement. 14c China gains from trade only if produces just solar panels. 15e A country gains from trade provided that, and to the extent that, the free trade relative price of cement to solar panels differs from the country s relative price of cement to solar panels in autarky and opportunity cost of cement in terms of solar panels. 16a Production is efficient under free trade because at least one country always produces only its comparative advantage good.
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 9 hours of labor, while producing one gallon of wine requires one hour of labor. The United States has 360 hours of labor and the ROW has 1260 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 180; wine endpoint 360; 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 140; wine endpoint 1260; 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 2 1/2 <1/7 7 1/7 1/7 9 1/9 >1/7 Find the relative price of cheese in terms of wine under free trade. What is its interpretation? A pound of cheese sells for 7 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 9 with RD=1/9; jump at 1/7 with free trade relative price 7; 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 7 gallons of wine with trade is cheaper than for foreign to stop producing 9 gallons of wine to make a pound of cheese. Buying a gallon of wine for 1/7 pound of cheese is cheaper than for home to stop producing 1/2 pound of cheese 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 180; wine endpoint 1260; 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 180; wine endpoint 1260; TPF* label; position of TPF* outside PPF*]