# Don’t print all pages – there are about 90 pages. Econ 448 International Economics Exam #1 Fall, 2013

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Econ 348 Exam #2 Fall, 2012 Professor Twomey

Please PRINT your name on the BACK of the last sheet. Answer on these sheets, using the flip sides if you need more space. Please ask for clarification if a question is unclear. Weights of each question are indicated. Good luck!

1. Identify the following with a sentence or at most two: (20 points)

1. Free rider problem

2. Domestic content requirement

3. Section 301

4. Rybczynski theorem

1. (15 points) Let’s do a question without graphs. We have two models that are quite different from the others – from conventional wisdom, as they say - in their assumptions and especially in their conclusions: optimal tariff and immiserizing growth. For each model, discuss how their assumptions differ from, say, the standard Hechscher Ohlin model, and what their important conclusion(s) is/are, and how that differs from ‘normal’.

2. (15 points) Consider protection for the domestic cloth-making industry. With free trade, each dollar of price is divided as follows: 40 cents value added to the firm, 42 cents for cotton yarn, and 18 cents for other fibers. Now, suppose that a 25% tariff is placed on imports of cloth, and a 16.7% (1/6) tariff is placed on cotton yarn, while other fibers are imported without tariffs. What is the effective rate of protection for the cloth industry?

(The prof has a couple of calculators, if you don’t want to leave the answer in the form of 6*2/9)

1. (20 points) The Ricardian and Heckscher Ohlin models provide the standard intellectual constructs for international trade theory. In this course we have discussed several alternative models, and this question focuses on two: product cycle and strategic export subsidy (Boeing/Airbus). For each of these two alternatives, identify and explain briefly three assumptions that they utilize, and that are important reasons for the proponents of these models reaching different policy conclusions than the free trade position associated with the Ricardian/Heckscher-Ohlin models.

2. (15 points) Draw the standard graph of the effects of a tariff (compared to free trade) levied on an individual product in a competitive industry in a small country. In terms of producer and consumer surplus, who gains and who loses, and what is the net cost to the country?

Explain briefly how that analysis is modified if: (separate graphs not needed)

The product is produced by one firm – a monopolist

The importing country is a large country

A quota is used instead of a tariff.

1. (15 points) Suppose the US imports bulldozers, especially from a company called Komatsu. Now, suppose the newly elected government decides to cut US imports of bulldozers by 60 percent. Officials are considering two options: a) using a large enough tariff that will lead to that reduction, or b) persuading Komatsu and other foreign bulldozer makers to set up a VER arrangement that will provide the same reduction of US imports. Which of these two policies would be less damaging to the US? Which would be less damaging to the world as a whole?

The median on this exam was 66: the high was 88.
Econ 348 International Trade Theory Exam #3 Fall, 2012 Professor Twomey

Please PRINT your name on the back of the LAST SHEET. You will LOSE POINTS if your name is visible anywhere else. Please answer on these sheets, using the backsides if you need more space. The weight of each question is indicated. Please ask for clarification if the question is not clear. Time: 90 minutes, or whatever you need. Good luck.

1. Identify the following with a sentence or at most two: (20 points)

1. CAP

2. CUSFTA

3. Maastricht

4. Transfer price

5. Round tripping

1. (15 points) When our textbook discusses the lack of success of trade embargoes, the first step is distinguishing between economic failure and political failure. Explain this distinction using non-technical language without graphs, but being more specific than saying that a political failure is when the politics doesn’t work.

b. There are two rather different reasons for economic failure. Explain them briefly.

1. (10 points) Suppose the United States, China, Brazil and Turkey (controlling 60% of world production) decide to form an international cartel, known as Tobacco Altruistic Raisers (TAR). We know that the price elasticity of world demand for tobacco is rather low in the short run, and higher in the long run, and common sense suggests that it would take other producers a few years to significantly increase their production. As an international economics expert, what do you predict will be the outlook for TAR’s success? Explain briefly.

2. (20 points) a. In terms of international migration: should the sending country restrict emigration? (assume that the country has the power to enforce this). If it does so, reversing an initial situation of free emigration, how should that affect the economy of the sending country?

b. Abstracting from age and gender, should a labor importing country like the US allow in high-skilled workers, or low skilled workers? Identify the different impacts that these two alternatives would provide on the US.

1. (20 points) a. What are the primary definitional distinctions between a free trade area a customs union , and a common market?

There are immediate differences between the arrangement of NAFTA and that of the European Union, that clearly exemplify the factors described in (a) above. Beyond them, identify two other economic arrangements (variables, laws) that distinguish NAFTA from the EU.

1. (15 points) a. According to our textbook’s model of foreign investment, should foreign direct investment (FDI) replace foreign trade, or increase that trade? Give at least one argument for each position.

b. Does permitting FDI increase a country’s welfare, or reduce it? Identify and explain briefly two reasons why it might increase welfare, and two reasons why it might decrease it.
The median on this exam was 92: the high was 95.
Econ 348 International Trade Theory Exam #1, Fall, 2011 Professor Twomey

Please PRINT your name on the BACK of the last sheet. Answer on these sheets, using the flipsides if necessary. Questions are equally weighted. Please ask for clarification if any question is unclear. Time: the entire class. Good luck.

1. Identify with a sentence or at most two:

1. One dollar one vote metric

3. External scale economies

4. Mercantilism

5. Stolper-Samuelson theory

1. In a Ricardian world of one factor of production and constant productivity, consider the case of two countries Alpha(a) and Zeta (z), and two products, rice (r ) and corn (c). The units of labor needed for one unit of output are as given in the following table.

Alpha Zeta i) Which country has absolute advantage in each good?

rice 6 4

corn 9 12 ii) Which country has comparative advantage in each good?

iii) If from an initial situation of no trade the countries adopt free trade, what will happen to the relative price of rice in Alpha?

iv) Suppose Alpha has 1800 workers. Draw

the production possibility curve for Alpha,

and on it indicate clearly the pre- and post-

trade positions of production and consumption,

and the movement in relative prices.

1. International trade theory is dominated by the Heckscher-Ohlin (HO) theory. List four assumptions for that theory.

Two alternatives for the H-O theory, discussed in our textbook, are the gravity model and the monopolistic competition model (a.k.a. oligopolistic or imperfect competition model).

For each of these models, discuss briefly how their assumptions – and their conclusions (predictions) – differ from that of the HO model.

1. Consider world trade in a single product, wood. Draw a graph illustrating the free trade equilibrium in wood. Suppose now that the housebuyers in the US (a big counry) experience a change in preferences, and decide to purchase more homes made of wood, and fewer of brick. Show on a parallel graph how that change of taste would affect US supply and demand for wood. How does the change in the US internal market affect the international price of wood? Does the answer to this last question depend on whether the US is a net exporter or importer of wood? Explain.

2. Consider in the Heckscher Ohlin model trade between two countries, Dungeonville (D) and Whereisit (W), with two products food (f) and clothing (c ), where the production of food is labor intensive, and that of clothing is capital intensive. D has more capital than W, and so W has relatively more labor than D.

Which country has comparative advantage in which good?

Draw the production possibility curve of D, indicating pre- and post-trade equilibrium levels of production, consumption, and relative prices.

According to the factor price equalization theorem, with the move from no-trade to free trade, what happens to the relative price of capital in D?

State what is meant by the Leontieff paradox.

Suppose that the Leontieff paradox were true of D for this example of trade between D and W, what would the movement from no trade to free trade imply for the relative price of capital in D?
The median on this exam was 71; the high was 87.
Econ 348 International Trade Exam #2 Fall, 2011 Professor Twomey

Please PRINT your name on the BACK of the last sheet. Answer on these sheets, using the flip sides if you need more space. Please ask for clarification of any unclear question. Time: the entire class. Good luck.

1. (20 points) Identify the following with a sentence or at most two:

1. Free rider problem

2. Immiserizing growth

3. Tariff escalation

4. Safeguard Policy

5. Section 301

1. (15 points) The textbook presents four classifications of dumping, in terms of why it occurs. Identify and explain briefly each one. For each one, discuss briefly whether standard trade theory and free market principles would argue whether this type is good or bad for the importing country.

2. (20 points) The Ricardian and Heckscher Ohlin models provide the standard intellectual constructs for international trade theory. We have discussed several alternatives, and this question focuses on two: product cycle and strategic export subsidy (Boeing/Airbus). For each of these, identify and explain briefly three assumptions that are important reasons for their proponents reaching different policy conclusions than in the Ricardian/Heckscher-Ohlin models.

3. (15 points) A free trade equilibrium exists in which the US exports machinery and imports clothing from the rest of the world. We are in a Heckscher-Ohlin world with two factors (K and L), machines are labor intensive, and the abundant factor for the US is capital. Suppose now that that there is an increase in K in the US.

1. What is the effect of this growth on the

US production possibility curve (graph optional)

1. If the world product price ratio is unchanged, what happens to actual production of machinery and cloth in the US?

2. What is the effect on the US willingness to trade?

3. Assuming now that the US growth can affect the international product price ratio, in what direction will Pmach./Pcloth move, and why?

1. 5. (15 points) Under what plausible conditions might a country benefit from subsidizing imports of a good? Explain your answer briefly, perhaps giving an example.

2. (15 points) Suppose that Brazil has only one firm that makes supercomputers, and because the country follows free trade, that firm has a low level of production, due to less expensive imports. Which of the following policies would be most costly for Brazil as a country, and which would be least costly? Explain briefly.

Policy A. Paying the Brazilian firm a production subsidy, with no tariffs on imported supercomputers.

Policy B. The Brazilian government imposes a tariff with the same impact on imports as Policy A

Policy C. Brazil imposes an import quota with the same impact on imports.

7.(15 points) Which of the following foreign shirt exporters is dumping in the US market? Explain briefly.

 Bad Boy Cult Cloth Darling Daisy Average Cost 50 50 50 Factory price: domestic sales 55 45 50 Factory price: foreign sales 53 45 52 Delivery price in the US 56 50 54

The median on this exam was 71; the high was 89.

Econ 348 International Trade Exam #3 Fall, 2011 Professor Twomey

Please PRINT your name on the BACK of the Last Sheet. You will lose credit if your name appears anywhere else. Use the backs of these sheets if you need more room. The weights of the questions are indicated separately. Please ask for clarification if any question is unclear. Time: 2 hours.

1. (24 points) Identify the following with a sentence or at most two:

1. Transfer pricing

2. Rules of origin

3. ISI

4. NICs

5. Political failure of an embargo

6. Maastricht

1. (15 points) Mercosur is the name of a Common Market in south America, including Argentina, Brazil, Paraguay and Uruguay. Standard trade theory says that the formation of a common market may bring either – or both – trade creation and trade diversion.

b. Make up examples of products (textiles, cars, etc. in some country) and use them to illustrate one example of trade creation, and one example of trade diversion.

1. (15 points) In the textbook’s discussion of the European Union, the author notes that standard theoretical models do not predict a big impact on the wellbeing of the EU’s member countries, as a result of their joining the EU. Yet the author clearly believes that the EU has made people (potentially) better off. He discusses several considerations that might suggest that the standard models underestimate these benefits, basically calling them ‘omitted factors’. Identify and discuss two.

2. (16 points) The textbook’s theoretical explanation of foreign direct investment, or Multinational Corporations, starts out by saying that a firm considering investing abroad would inevitably be at a disadvantage (because of language, culture, etc.). The author then goes on to discuss four other considerations that might make overseas investment attractive. One of these is Oligopolistic Rivalry. What are the other three considerations or advantages that might lead to foreign investment? For each of these three, give two examples.

3. 15 points) International migration is of growing importance in today’s world. Explain – and illustrate with a graph – the effects of migration on wages and output in the source country and on the receiving (or host) country.

b. The standard model can be modified, by including other aspects of migration (some of which we might call externalities). For both the source country and the receiving country, identify two extra factors that would make migration more attractive, and two that would make it less attractive.

1. (15 points) The Argentine economist Raul Prebisch had a famous hypothesis that relates to the debate about trade policies of Latin America (and by extension other developing countries).

What is that hypothesis?

What policy prescription did many economists and politicians, especially in Latin America, draw from this hypothesis?

Give two reasons why the Prebisch hypothesis might be correct, and two reasons why it might be wrong.
The median on this exam was 73; the high was 96.

Economics 348 International Trade Theory Exam #1 Fall, 2010 Professor Twomey

Please PRINT your name on the BACK of the LAST sheet. Answer on these sheets, using the backsides if needed. Questions are equally weighted. Please ask for clarification if any question is unclear. Time: the entire class.

1. Identify the following with a sentence or at most two:

1. Wealth of Nations

2. Internal economies of scale

3. Gravity model

5. The distinction between a ‘large’ country and a ‘small’ country

2a. Define producer and consumer surplus.

Suppose France is an importer of petroleum. Illustrate on a graph its producer and consumer surplus with free trade, compared to no trade.

Suppose now that the world price of petroleum falls due to a new discovery in Saudi Arabia. How will that affect consumer surplus in France? Illustrate on another graph.

2b. The textbook comments that the mercantilists viewed trade as a zero sum activity – that one country’s gains come at the cost of some other country’s loss. This is not the view of Adam Smith, Ricardo, and the rest of us. What explains that difference?
3a. What are some of the major assumptions for the Heckscher-Ohlin (-Samuelson) model?

b. Consider a world composed of two countries, Australia (A) and Belgium (B), with two factors capital and labor, and two products, cloth (c) and desks (d). Cloth is always labor intensive. Belgium has relatively more capital than Austria.

Now, consider the before and after situations of no trade/ free trade. In terms of the Heckscher-Ohlin model, how will the opening of trade affect relative wages in Australia?

c. Draw a pair of production possibility curves for Australia and Belgium, illustrating pre-trade and post-trade equilibria in both countries.

4a. What is meant by the Leontieff paradox? Why might it have been important?

b. Identify two explanations that have been offered to explain the Leontief paradox.

c. What is meant by intra-industry trade, why is it important?
5. Consider now a Ricardian world composed of two countries, (Input/Q) Spain Chile

Spain (S) and Chile (C ), and two goods, food (f) and games (g).

Suppose the labor input per unit of output for these Food 20 25

activities is as indicated in the accompanying table. Games 50 75

Which country has absolute advantage in which

good? Why?

Which country has comparative advantage in which good? Why?

What are the limits to the free trade relative price of Food?

What will happen to the relative price of food in Spain, if both countries agree to free trade?

Assume that Chile has 150 workers. Draw a production possibility curve for Chile, indicating the intercepts on the two axis, and showing a (hypothetical) free trade line.

The median on this exam was 71; the high was 99.
Econ 348 International Trade Fall, 200 Exam #2 Professor Twomey

Please PRINT your name on the BACK of the LAST sheet. Answer on these sheets, using the back sides if you need space. The weight of each question is indicated. Please ask for clarification if any question is unclear. Time: the entire class.

1. Identify the following with a sentence or at most two (20 points):

1. Free rider

b) Section 301

c) Rybczynski theorem

d) Persistent dumping

e) Sudden damage effect

1. (15 points) Suppose Australia has only one firm that makes aircraft. Without assistance from the government, that firm has lost most of its business to imports from the United States and Europe. Which of the following policies would be most costly for the Australian nation as a whole, and which would be least costly? Explain.

1. Paying the lone Australian firm a production subsidy per plane, without protecting it against imports.

2. Imposing a tariff equal to the production subsidy in the above option a.

3. Imposing an import quota that cuts imports just as much as the option b.

1. (15 points) Suppose you are a benevolent dictator who has just come to power in your country (which is a large, underdeveloped country), and you want to use economic policies to help your people. You can channel subsidies and loans to create growth. In principle, should you direct those policies towards the exporting industries or towards the import competing industries? Explain briefly.

1. (10 points) Consider a situation in which with completely free trade, a jacket that costs \$100 uses \$30 worth of domestic cotton and \$30 worth of synthetic fabrics. Now suppose that a 25% tariff is place on imported jackets, that a 1/6 (16.7%) tariff is placed on cotton, and synthetics are still imported without tariffs. What is the effective rate of protection on the jacket industry?

1. (10 points) Why does the Heckscher-Ohlin theory predict that most research and development (R&D) activity is done in the industrialized countries?

1. (15 points) Recently, an important American political figure, Mayor Michael Bloomberg, criticized the Obama administration’s decision to investigate Chinese subsidies on exports of solar panels and other clean energy products, saying “There is a country on the other side of the world that subsidize(s) things so we (US) can buy them cheaper and have better product, and we’re going to criticize that?” The textbook describes predatory dumping as temporarily charging a low price in the export market, with the purpose of driving foreign competitors out of business, so that later the firm can raise its prices. The textbook also states that WTO rules allow countries to retaliate against dumping if the dumping injures domestic import competing industries. Are these three positions identical? Contradictory? Or what?

1. (15 points) Let’s assume that we understand the product cycle hypothesis, as applied to international trade. (Please don’t try to draw the graph).

1. In terms of its assumptions, how does the product cycle story differ from standard Heckscher-Ohlin trade model? Identify and explain briefly three differences.

2. The Heckscher-Ohlin model, along with standard Ricardian trade models, is usually interpreted to advise free trade and no government intervention. Identify and explain briefly two government policies that might be justified by supporters of the product cycle model.

The median on this exam was 68: the high was 95.

Econ 348 Final Exam Fall, 2010 Professor Twomey

Please PRINT your name on the BACK of the LAST Sheet. The questions have different weights. Ask for clarification if a question is not clear. Use the backsides of these sheets if you need more room. Note that there is a separate handout of a newspaper article. Time: 90 minutes. Good luck!

1. Identify the following with a sentence or at most two: (20 points)

1. Round tripping

2. Common Agricultural Policy

3. CIS

4. Rules of Origin

5. The difference between a Free Trade Area and a Customs Union

1. (10 points) Explain the difference between trade creation and trade diversion.

Suggest (make up?) examples of both trade creation and trade diversion, for both the European Union and Mercosur (Southern Latin America). (one example for each option).

1. (15 points) Perhaps not surprisingly, our textbook Is not in favor of trade embargoes. Identify and discuss briefly the author’s distinction between political and economic failures of an embargo.

When Pugel discusses the economic failure of byocotts, he suggests two main reasons. Identify them and discuss them briefly.

1. (20 points) a. According to the textbook’s analysis, what are the standard effects of international outmigration (from the low wage country) on that country’s output, wages, and return to capital.

b. When analyzing the effects of migration, many people look to effects beyond the standard ones. One set of these effects can be called externalities, and one can identify some externalities as they impact the government. Identify and discuss one positive externality, and one negative externality, of immigration on the host country’s (high wage country) government.

1. (15 points) Identify what is meant by the argument of declining terms of trade of primary product exporting countries.

Give two reasons that were originally put forth to argue that this would happen.

Give two reasons for saying that this was not going to occur.

If the people who originally proposed this declining terms of trade argument were to be put via a time capsule into our world of 2010, identify two considerations that they might feel obliged to insert into their argument.

1. (20 points) The attached article, from last week’s New York Times, discusses a Chinese-owned firm in the US that is producing and selling wind turbines in the United States. In terms of our textbook’s analysis of capital flows, it suggests several questions. Answer and discuss them briefly.

1. Does the article suggest factors exemplifying the textbook’s explanation of FDI, described as OLI (enterprise/organization, location, and internalization)? Which are, or are not, included?

2. Given that income levels in China are low, should we expect that the pay of the American employees, such as Mr. Rowland and Mr. Rosenzweig, would be higher or lower than what they receive in American owned firms?

3. Should be we surprised that this foreign owned company imports a lot of its inputs?

4. Is the comparison to FDI into the US by Japanese car producers during the 1980s valid?

5. Is this FDI good for the US? Second Best, first best/second worst, absolute worst?

The median on this exam was 78; the high was 100.

Econ 348 International Trade Exam #1 Fall 2009 Professor Twomey

Please PRINT your name on the back of the last sheet. Answer on these sheets, using the backs if you need space. Please ask for clarification if any question is unclear. Questions are equally weighted. Time: the entire class.

1. Identify the following with a sentence or at most two:

2. External scale economies

3. Community indifference curves

4. Arbitrage

5. Specialized factor patterns

1. Consider a theoretical of world in which there are two countries, Chile (Ch) and Brazil (Br), there are two factors, land (T) and workers (W), and two products, Fruit (F) and Videomachines (V). Fruit is land intensive, and Chile has relatively more workers. There are increasing opportunity costs in both industries in both countries.

• In the context of the Heckscher Ohlin Theorem, if there is free trade, which country exports which good? Draw a graph of the production possibility curve of Chile, indicating the pre-and post-trade positions of production and consumption.

• What happens to the relative price PF/PV in Brazil, as a result of the adoption of free trade? Explain briefly.

Are workers in Chile helped or hurt by free trade? Explain briefly.

1. The textbook has a brief discussion of “What’s behind the bowed out production possibility curve?” Basically, what’s the answer – what economic reason implies it is generally correct to draw this curve this way?

b. Draw a graph illustrating – in a simple (Chapter 2) model of a single product - the three graphs of the derivation of the supply of exports of rice, in terms of two specific countries’ domestic supply and demand of rice. On this graph, illustrate the effect on the exporting country’s producers and consumers, of growth of the national economy of the rice importing country.

1. Explain real briefly what is meant by the Heckscher Ohlin Theorem, and by the term “gains from trade.”

Do the following support or go against Heckscher Ohlin? Also, do they deny gains from trade? Explain each answer briefly.

2. The widespread existence of monopolistic competition.

3. The fact that unemployment in the U.S. is currently almost 10 percent.

4. The fact that Japan exports steel, while not having any iron ore to mine

5. The fact that China is a net importer of food

1. Consider the following matrix of pre-trade labor productivities (output/unit of labor input), in a Ricardian world in which labor is the only factor of production
 Denmark (D) Korea (K) Aardvarks (A) 6 10 Zebras (Z) 9 20

Which country has absolute advantage in which good?

Which country has comparative advantage in which good?

If there were to be free trade, what are the limits of the world’s relative prices PA/PZ?

If Denmark has 18 workers, draw Denmark’s Production Possibility Curve, and illustrate on it Denmark’s pre-trade and post-trade positions of production and consumption.

The median on this exam was 67; the high was 92.
Econ 348 International Economics Exam #2 Fall, 2009 Professor Twomey

Please PRINT your name on the BACK of the LAST SHEET. You will lose credit if it appears anywhere else. Answer on these sheets, using the backs if you need more space. Please ask for clarification if any question is unclear. Time: the entire class.

1. Identify the following with a sentence or at most two (20 points):

1. Gravity model

b. Domestic content requirement

1. Rybczynski theorem

3. Doha round

1. (15 points) a. Why does a domestic monopoly prefer quotas to tariffs (even when they produce the same quantity of imports)?

1. Why do economists prefer subsidies to tariffs?

1. Consider the following three manufacturers and exporters of laptops to the US (10 points).

 Aggressive A Bully B Cowardly C Average Cost 20 20 20 Price charged at their local factory for domestic sales 22 19 20 Price charged at their local factory for export sales 21 19 21 Price delivered to the US port 23 20 22

1. Which company (or companies) is/are dumping? Explain your reasons.

1. (10 points) Distinguish between predatory and persistent dumping.

1. (15 points) A number of Latin American countries export coffee and important other goods. Suppose a long-term drought reduced coffee production in those countries, although they remain exporters of coffee. Explain why the drought might lead to an increase in the region’s well-being. What economic factors would make this gain in well-being more likely?

2. (15 points) A single firm’s innovations in production technology often benefit the production of other firms, because these other firms learn about the new technology and can use some of these ideas for their own production.

1. Is there an externality here?

2. How would an economist rank the following two policies in this situation, and why?

1. A tariff on imports, to make sure that domestic production using the new technology occurs.

2. A subsidy to domestic production, to make sure that domestic production using the new technology occurs.

1. What third policy (a tax or a subsidy or something else) would the economist recommend as even better than these two suggestions? Explain briefly.

1. (15 points) a. Consider the concept of one dollar-one vote metric, applied to a small open economy. If political decisions in this country were based on this metric, how many/what kinds of tariffs would the country have?

1. What is the free-rider problem, and how does it affect the determination of trade policy?

The median on this exam was 66; the high was 100

Econ 348 International Trade Exam #3 Fall, 2009 Professor Twomey

Please PRINT your name on the back of the last sheet. You will LOSE CREDIT if it appears anywhere else.

Answer on these sheets, using the backsides if you need space. Please ask for clarification for any unclear question. Time: 90 minutes. Good luck!

1. Identify the following with a sentence or at most two (20 points):

1. Joint venture

2. Maastricht

3. Transition economies

4. Round-tripping

5. Transfer pricing

1. (15 points) Around 1950 Raúl Prebisch and others argued that developing countries were facing downward trends in their terms of trade. Identify three distinct reasons given to defend this assertion.

Were they right?

1. (15 points) Identify and distinguish between: Free Trade Agreement (or Area), Customs Union, and Common Market.

Explain briefly the textbook’s two reasons for failure of an embargo: political and economic.

1. (15 points) Consider two countries, A and B, that are about to sign a free trade agreement. Before the agreement, A imports DVD recorders from other countries at \$100/unit, and levies a tariff of 30% on them, making their cost to A’s consumers equal to \$130/unit. Country B produces the DVD recorders at \$110/unit.

1. (15 points) Suppose you are an economist working for the US government specializing in the analysis of immigration from Mexico to the US. Suppose you observe the following changes in wage rates and migration flows. Describe one shift in conditions in either country, or in the migration process itself, that could solely itself have caused these changes.

1. A rise in wages in both the US and Mexico, and an increase in migration flows from Mexico to the US

2. A drop in wage rates in both Mexico and the US, and an increase in migration flows from Mexico to the US

3. A drop in US wages, and an increase in Mexican wages, and an increase in migration flows from Mexico to the US

1. (20 points) a. The textbook has a discussion of whether FDI will increase trade, or decrease it. Give one reason for each of those outcomes.

b. Does the textbook’s model of FDI, described in class as OLI model, assume full employment? Explain.

1. International economists analyze policies or economic phenomenon in terms of whether they increase or lower national (potential) welfare. Our textbook is generally in favor of FDI. However, there are some cases where the existence of FDI might lower welfare. Identify two distinct cases.

The median on this exam was 74; the high was 92.

Econ 348 Exam #1 Fall, 2008 Professor Twomey
Please PRINT your name on the BACK of the last sheet. Answer in the space provided, or use the backsides of these sheets if you need it. Questions are equally weighted. Please ask for clarification if the question is unclear. Time: the entire class. Good luck.

1. Identify the following with a sentence or at most two:

a. Mercantilism

b. Relative factor endowments

c. Gravity model

d. One-dollar one-vote metric

2a. State (don’t prove or illustrate, just state) the Heckscher Ohlin Theorem

b. What are some of the important assumptions that are made for the Heckscher Ohlin Theorem?

c. One of the famous implications of the Heckscher Ohlin Theorem is the Stolper Samuelson Theorem. State that theorem.

d. What is the Leontieff paradox, and how does it relate to Heckscher Ohlin Theorem?

3. Consider a standard Ricardian world with two countries, A and Z, and two products, autos and wheat. The labor inputs per unit of output in these two countries are as given in the table (and these are constant).

 Inputs per unit of autos Inputs per unit of wheat A 75 100 Z 50 50

1. Does country A have absolute advantage in the production of autos? Of wheat?

2. Does country A have a comparative advantage in the production of autos? Of wheat?

3. If no international trade is allowed, what price ratio would prevail between autos and wheat in A?

4. If free international trade is allowed, what are the limits of the equilibrium international price ratio? What product would country A export, and what would it import?

4a. China is a large country, both in terms of geographical size and in terms of population. After making major changes a couple of decades ago in its orientation towards growth, and moving towards free trade, China now is a major rice importer. The textbook argues that it is quite understandable that China would import rice, instead of exporting that product. What is the key to that argument?

b. There are two ‘stylized facts’ about international trade, that are inconsistent with standard trade theory. First of all, there is a growing amount of intra-industry trade. Secondly, a few large firms dominate trade flows.

i) First of all, what is intra-industry trade?

ii) A standard explanation for these two stylized facts is the presence of monopolistic competition. What is meant by this term, and how does this (assumed) world differ from the world assumed in standard trade theory?

iii) Trying to avoid the use of graphs, describe how monopolistic competition explains – at least in part – the two stylized facts mentioned above.

5. Consider a world composed of two countries, Alphaville (α) and Betazone (β), with only two products DVDs (D) and erasers (E). Suppose furthermore that there are only two factors of production, capital (K) and labor (L), and that DVDs are capital intensive, and that the other assumptions for the Heckscher Ohlin theory are valid. Finally, suppose Alphaville is relatively capital abundant.

1. Draw the production possibility curves for both countries. For each country, indicate pre-trade and post trade situations of production and consumption.

b. What should the opening of trade do to the incomes of workers in each country? (A graph is helpful, but not obligatory).

c. One of the justifications for using Community Indifference Curves is that there exists compensation from winners to losers. In Betazone, who benefits and who loses from free trade?

The high on this exam was 99. The median was 66.
Econ 348 Exam #2 Fall, 2008 Professor Twomey

Please PRINT your name on the BACK of the last sheet. The weight of each question is indicated. If a question is not clear, please ask for clarification. Use the backs of these sheets if you need more space. Time: the entire class. Good luck.

1. Identify the following with a sentence or at most two: (20 points)

1. Tariff escalation pattern

2. Rybczynski theorem

3. Theory of second best

4. Dutch disease

5. Free rider problem

1. (15 points) Consider the situation of US production and imports of silk sweaters. Suppose the world price is \$50/unit. The world’s competitive producers use \$30 worth of silk in the production of each sweater. The US produces and imports silk, as well.

1. If the US has free trade in silk, and a 20% tariff on imported sweaters, what is the effective rate of protection for the US sweater industry?

b. Consider a more complicated situation. The US has a 40% tariff on imported sweaters, and a 20% tariff on imported cotton. For this case, what is the effective rate of protection for the US sweater industry?
3. (15 points) Explain briefly what is meant by persistent dumping.

Out textbook discusses a case when persistent dumping can be economically rational. Explain and illustrate it with a graph.

In the case you have just discussed, should the importing country welcome the imports, or keep them out with prohibitive tariffs? Discuss.
4. Consider the case of a large country, one that can affect the international price of its exports. If this country were to intervene in its export activities, would it be better off subsidizing its exports, or taxing them? Explain briefly (10 points)
5. (15 points) Suppose Australia has only one firm that makes aircraft. Without assistance from the government, that firm has lost most of its business to imports from the US and Europe. Which of the following policies would be most costly for the Australian nation as a whole, and which would be least costly? Explain briefly.

Policy A. Paying the lone Australian firm a production subsidy per plane, without protecting it against imports.

Policy B. Imposing a tariff equal to the production subsidy in Policy A.

Policy C. Imposing an import quota that cuts imports just as much as Policy B would.

6. (15 points) A free-trade equilibrium exists in which the US exports machinery and imports clothing from the rest of the world. The goods are produced with two factors: capital and labor. The trade pattern I the one predicted by the Heckscher Ohlin theory. Now, an increase occurs in the US endowment of capital, its abundant factor.

1. Explain and illustrate with a graph the effect on the shape and position of the US production possibility curve.

2. If world prices are unchanged, what is the effect on the actual quantities produced in the US? Explain

3. If the growth in the US were to affect the world price ratio (pexports/pimports), what would be the direction of this change?

4. Is it possible that the US national well-being declines as a result of the endowment growth and the resulting change in the world price ratio? Explain briefly.

7. (10 points) Consider the following payoff matrix for two firms Americana and Europa, located in the US and the EU, respectively, who are the only potential producers of a new product.

 Europa produces Europa does not produce Americana produces 5 0 5 60 Americana does not produce 60 0 0 0

b. If instead the gain in the upper left hand corner o Americana were 5 and that of Europa were 0, should the EU’s government offer a subsidy to Europa? Explain.

c.What strategy should the EU government follow – subsidize or not? Explain
The high on this exam was 84. The median was 61.
Econ 348 International Trade Final Exam, Fall 2008 Professor Twomey

Please print your name of the BACK of the LAST SHEET. Please answer on these sheets, using the backs if you need more space. The weight of each question is indicated. Please ask for clarification if any question is unclear. Time: 90 minutes. Good luck!

1. Identify the following with a sentence or at most two: (20 points)

1. Rules of origin

2. ISI

3. Mercosur

e) Transfer pricing

1. (10 points) When speaking of embargoes, our textbook argues that there are two major types (or reasons) for the failure of embargoes, political and economic.

Describe briefly what is meant by each of these failures.

Name two countries/cases, about whom it is often said that the embargo against them was not successful.

1. 15 points) Raúl Prebisch and others asserted that the prices of raw materials faced a declining long term trend.

a). Identify and explain briefly two reasons that was given to explain the declining trend.

b). What policy prescription did they derive from this assertion? Explain.

1. (20 points) As discussed in our textbook, John Dunning’s ‘eclectic model’ of foreign direct investment has five parts that attempt to explain FDI. The first is a recognition that a multinational firm is at an inherent disadvantage in producing overseas. The other four discuss various reasons or motives for FDI. Identify and explain them briefly.

Give two reasons for the low level of FDI into the US in the 1930s.

1. (15 points) Standard economic analysis – as in our textbook – tends to analyze economic situations with what has been called a static model; the supply and demand curves are given, and the benefits and costs of particular actions can be calculated directly from them. However, in many cases, there are asserted to exist dynamic considerations and externalities, which alter the conclusions from the static model. Here are three topics, in which the dynamic considerations were discussed, and at least some believe them to be larger and more important than the static ones. In each case, identify what are the dynamic considerations.

1. The benefits of establishing a common market such as the European Union.

b). The costs and benefits to the sending country of having its citizens migrate overseas

c). Whether or not third world countries should follow free trade, or engage in protectionism.

1. (20 points) Consider a world of two countries, Industrytown and Farmville, where Industrytown is characterized by high wages, and Farmville has low wages. Suppose that an agreement is reached allowing international migration. Draw graphs of the labor markets in each country indicating the before and after situation of wages and employment.

In Industrytown, what is the impact of migration on wages, the return to capital, and total output? (short explanation is optional).

The analysis of immigration policy in the U.S., Canada, or Australia often refers to a ‘point system.’ What is meant by this term, and what are its intended effects?

The high on this exam was 100. The median was 66.
Econ 348                        Fall, 2007                Exam #1     Professor Twomey

Please PRINT your name on the BACK of the last sheet. Answer on these sheets, using the backsides if necessary. Please ask for clarification if any question is unclear. Questions are equally weighted. On this exam, especially, be sure to label the axes. Time: the entire class. Good luck

1. Identify the following with a sentence or at most two:

Product Differentiation

Opportunity cost

Stolper Samuelson Theorem

2a. Describe what is meant by the Leontieff paradox. Identify three potential explanations of it.

b. What is intra-industry trade? How is it measured? Why is it important?

3a. Explain briefly why is trade a substitute for migration in the Heckscher-Ohlin model.

b i. If there is a downward sloping supply curve, the models of foreign trade (and many others) become dramatically different. Explain briefly two different reasons why supply curves might be downward sloping.

ii. In terms of models of foreign trade, what might be two ways the conclusions/predictions would change if there are downward sloping supply curves.
4. In the context of a Heckscher-Ohlin model, with two countries Dudsville (D) and Bluestown (B ), two products aardvarks (A) and yo-yos (Y), and two factors of production, land (T) and labor (L), the production of yo-yos is labor intensive, and Dudsville has relatively more land;

draw the production possibility curves of the  two  countries, and on them illustrate the gains from trade for each country.

In the move from no-trade to free trade, what happens  to wages in each country? Illustrate on a graph is optional.
5a. Suppose the U.S. produces laptops, and with free trade that we would export laptops. Considering a simple no-trade/free trade comparison, show how the opening of trade will affect producer surplus and consumer surplus for laptops in the U.S. Illustrate with a graph.

b. Consider two countries, Alpha and Beta, and two products, xylophones (X) and zebras (Z). In a simple Ricardian world of one factor of production with constant productivity, suppose the labor input is:

Alpha       Beta

X         6             10

Z          9             20
Which country has absolute advantage in which good?

Which country has comparative advantage in which good?

What are the limits of free trade prices of PX / PZ ?

Assuming Beta has 400 workers, draw a production possibility curve for the country, and indicate on the graph the positions of pre-trade and post-trade  production and consumption.

Which country has absolute advantage in which good?
The median on this exam was 67; the high was 96.
Econ 348               Fall, 2007             Exam #2                Professor Twomey
Please PRINT your name on the back of the last sheet. Use the flip sides of these sheets if you need more room. The weights of each of the questions are indicated. Please ask for clarification if any question is unclear. Time: the entire class.  Good luck.

1. Identify the following with a sentence or at most two (20 points):

Section 301

Rybczynski Theorem

Countervailing duty

Effective rate of protection

Domestic content requirement
2. Paul Krugman has argued for strategic trade policy helping U.S. export sectors. His well-known analysis of Boeing versus Airbus is featured in our textbook. Yet standard trade theory says that export subsidies harm a country.  To what extent are the differences between his analysis and standard textbook due to the following assumptions/considerations. Explain each answer briefly (15 points).

a. Krugman assumes large country (versus small country)

b. Krugman assumes increasing returns to scale (versus constant returns to scale)

c. Krugman considers subsidies, (which are better than  tariffs).

d. Krugman considers redistribution of benefits

Krugman’s analysis captures product cycle effects.

3.  Explain, and illustrate with a graph, the effects of a tariff in a small country, identifying the costs/benefits to producers, consumers, government, and net cost (20 points).

Explain, and don’t illustrate with a separate graph, how the above analysis changes if one assumes a large country levies the tariff.

The standard analysis says that a subsidy is better than a tariff. Explain this point, making reference to your answer to the first part of this question.
4. The Theory of Second Best is frequently used to justify tariffs. For the case of the U.S., pick a product and suggest some situation where the Theory of Second Best has been (might be) used to justify protectionism. Explain real briefly. (10 points)
5. What is trade adjustment assistance?  Is it compatible with the specificity rule? Why might it be criticized for generating perverse incentives? (10 points)
6. Explain, (graph optional) what is meant by immiserizing growth (15 points).

Is this more likely to occur with:

Small country or large country?

Steep (inelastic) or flat demand curve for exports

Having a set of diverse exports, or only one or two products.

Growth that is due to productive capital, technology, or raw material supply

7. State the infant industry argument (graph optional). If you were the leader of a third world country considering this policy, identify and explain briefly two factors that you should need to take into account in considering this policy. (10 points).
The median on this exam was 73; the high was 94.
Econ 348                         Final Exam                Fall 2007              Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on these sheets, using the flip sides if you need more space. Please ask for clarification if any question is unclear. Note that the questions have different weights. Time: one and a half hours. Good luck!

Identify the following with a sentence or at most two: (20 points)

MERCOSUR

Round tripping (FDI)

Joint Ventures

Environmental Kuznets Curve
2a (15 points) Standard economic theory suggests that both international trade and FDI would predominantly take place between rich and poor countries. Yet both seem to occur among rich countries. Identify and explain very briefly two reasons that have been proposed to explain this outcome.

b. Give one argument for the position that international trade substitutes for FDI, and one that asserts that trade and FDI are complements, that is, they go together.

3.  (10 points) Identify and explain briefly two different general situations that might lead to an economic failure of a trade embargo.
4. (15 points) Consider a simple textbook model of allowing the migration of labor between poor and rich countries. What happens to wages and output in each country?

- In terms of the market for labor in the rich country, identify which group – bosses or workers - receives “producer” and “consumer” surpluses, and use a graph to illustrate and explain what happens to producer and consumer surplus in that country.

- In the standard economic analysis of the net effect on the country of allowing international migration, is there an assumption of “one dollar one vote”, of redistribution of benefits, or is there no comparison of welfare between groups? Explain.
5. (10 points) Give two arguments supporting the position of Raul Prebisch and others, that the long run trend is for a deterioration of the prices of raw material exports.

That position is clearly incorrect with respect to petroleum. Might it be true for, say, iron or aluminum? Discuss.

6. (15 points) Our textbook follows the work of John Dunning in explaining the existence of multinational enterprises (MNEs) by referring to five factors, four of which counteract the first, which is the inherent disadvantage of being foreign. Two of the bigger US MNEs are IBM and Exxon. Identify the other four factors that explain MNEs, explaining or illustrating them by reference to IBM or Exxon.
7. (15 points) Which of the following probably violate the rules of the WTO? Explain each answer briefly.

A country’s government places a tax on domestic production to reduce pollution caused by this production.

A country’s government prohibits imports of foreign goods produced using production methods that would violate this importing country’s environmental protection laws.

A country’s government places a tax on domestic consumption of goods (both imported and domestically produced) to reduce pollution caused by this consumption.

d. A country’s government restricts imports of a good to reduce pollution caused by consumption of this good.
The median on this exam was 82; the high was 100