SESS0063 INTERNATIONAL TRADE ALTERNATIVE ASSESSMENT 2019/20 WORD LIMIT: 1500 Answer all questions Section A. Multiple Choice Questions (30%) Each question is worth 3 points. Provide a brief explanation for justifying your answer and get a full mark. 1. In the specific factors model, a 5% increase in the price of food accompanied by a 0% increase in the price of cloth will cause wages to ________, the production of cloth to ________, and the production of food to ________. a) Increase by less than 5%; decrease; increase b) Increase by 5%; remain unchanged; remain unchanged c) Increase by more than 5%; increase; remain unchanged d) Remain constant; increase; increase e) Remain constant; decrease; decrease 2. In the Heckscher-Ohlin model, when there is international-trade equilibrium: a) The capital rich country will charge more for the capital intensive good than the price paid by the capital poor country for the capital-intensive good. b) The relative price of the capital intensive good in the capital rich country will be the same as that in the capital poor country. c) The workers in the capital rich country will earn less than those in the poor country. d) Workers in the capital rich country will earn more than those in the poor country. e) The capital rich country will charge less for the capital intensive good than the price paid by the capital poor country for the capital-intensive good. 3. When a country’s labor market is in equilibrium in the specific factors model, the wage rate… a) …will be the same in both sectors. b) …will be higher in the export-competing sector
c) …will be higher in the import-competing sector. d) …will be higher in the sector where product price is higher. e) …will be higher in the sector where product price is lower. 4. If the U.S. (a large country) imposes a tariff on its imported good, this will tend to a) improve the terms of trade of the United States. b) have no effect on terms of trade. c) improve the terms of trade of all countries. d) cause a deterioration of U.S. terms of trade. e) raise the world price of the good imported by the United States. 5. Given the information below, Forewing’s opportunity cost of cloth is: a) 0.5. b) 2.0. c) 6.0. d) 1.5. e) 3.0. 6. In the specific factors model, the effects of trade on welfare overall are ________ and for fixed factors used to produce the imported good they are ________. a) ambiguous; positive b) negative; positive c) positive; ambiguous d) positive; positive e) positive; negative 7. The strongest political pressure for a trade policy that results in higher protectionism comes from: a) domestic consumers lobbying for export restrictions. b) domestic workers lobbying for import restrictions. c) domestic workers lobbying for free trade. d) domestic workers lobbying for export restrictions. e) domestic consumers lobbying for import restrictions. 8. The efficiency case made for free trade is that as trade distortions such as tariffs are dismantled and removed
a) Deadweight losses for producers and consumers will decrease, hence decreasing national economic welfare. b) Government tariff revenue will decrease, and therefore national economic welfare will decrease. c) Government tariff revenue will increase, hence increasing national economic welfare. d) Deadweight losses for producers and consumers will decrease, hence increasing national economic welfare. e) Government tariff revenue will decrease, and therefore national economic welfare will increase. 9. If Australia has more land per worker, and Belgium has more capital per worker, then if trade were to open up between these two countries… a) The real income of capital owners in Australia would rise. b) The real income of labor in Australia would clearly rise. c) The real income of labor in Belgium would clearly rise. d) The real income of landowners in Belgium would fall. e) The real incomes of capital owners in both countries would rise. 10. According to the theory of comparative advantage, a country will export a good only if a) It can produce it using less labor than other countries. b) Its productivity is higher in producing the good than the productivity of other countries in producing it. c) Its wage rate in producing the good is lower than in other countries. d) Its cost of producing the good, relative to other goods, is at least as low as in other countries. e) All of the above. Section B. Problem Set (70%) Provide the detailed derivation for each answer. 1. The Ricardian Model. Home has 2,400 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 6, while in banana production it is 4. There is also another country, Foreign, with a labor force of 1600. Forewing’s unit labor requirement in apple production is 10, while in banana production it is 2.
a) Graph Home’s and Forewing’s production possibility frontier in two separate graphs. (4 points) b) What is the opportunity cost of apples in terms of bananas? (4 points) c) Which country has an absolute advantage in producing apples? Which in bananas? Which has a comparative advantage in apples Which in bananas? (4 points) d) In autarky, what would the price of apples in terms of bananas be? Why? (4 points) e) Construct the world relative supply curve. (4 points) f) Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples. There is free trade, describe its pattern. (5 points) 2. Suppose Australia, a land (K)-abundant country, and Sri-Lanka, a labor (L)- abundant country, both produce labor and land intensive goods with the same technology. Use the diagram below to briefly answer the questions: a) In the pre-trade situation, where on the K/L axis will you find each of the two countries? (4 points) b) In the pre-trade situation, which product is the labor intensive, and which is the land intensive one? If trade were to open up between these two countries, which would export Cloth and which would export Food? Is this consistent with the Heckscher-Ohlin model? (4 points) c) Show where the relative price of cloth to food will be found once trade opens between these two countries. (4 points)
Show where the relative wages of each will appear once trade opens between these two countries. (4 points) e) Why is the H.O. model called the factor-proportions theory? (4 points) 2. Using the Standard Trade Model in which the two goods are bananas and apricots, and the two countries are Moldova and Iceland with Iceland initially exporting bananas to Moldova, work out the effects of changes in (i) the international relative price of bananas and (ii) the outputs of both goods in both countries, on…
) A shift in consumer preferences in both countries in favor of apricots. (5 points) b) A technological improvement that increases, for any given allocation of resources, the output of bananas in Iceland by 20%. (5 points) c) A prohibitive tariff (i.e., one that reduces imports to zero) levied by Moldova. (5 points)
Consider the two Ricardian economies whose endowments and technologies are those described below. Each has a fixed endowment of labor – its only factor of production – and can produce two goods, X and Y, using the indicated constant amounts of labor per unit of output: a) What are the autarky wages of workers in country A, in units of good X per unit of labor? In units of good Y per unit of labor? What are the autarky wages of workers in country B, also in units of good X and in units of good Y? Can you tell which country’s workers are better off in autarky? (5 points) b) Suppose now that free trade between these countries leads to a world equilibrium price of px/py = 0.60. Calculate the new wages of labor in each country in units of both X and Y. Are these workers better off, worse off, the same, or is it impossible to tell? (5 points)