Econ 441 Alan Deardorff Fall Term 2008 Final Exam Page 1 of 9 NAME: ____________________________________ Student ID No.: ____________________________ Economics 441 International Trade Theory Prof. Alan Deardorff Final Exam December 8, 2008 INSTRUCTIONS 1. Please do not open the exam until you are told to do so. 2. PLACE YOUR NAME AND STUDENT ID NO. ON THE EXAM. 3. This exam has 60 points and you have approximately 120 minutes to complete the test. 4. Check that you have all 9 pages of the exam, including this cover sheet. 5. Answer all questions on these sheets. 6. Good luck!Econ 441 Alan Deardorff Fall Term 2008 Final Exam Page 2 of 9 1. (10 points) The figures below show the production possibilities of the two countries, A and B, in a Ricardian model. In an initial equilibrium with free trade, Country A is producing at point € P1Aand consuming at point € C1A, while Country B is consuming at point € C1B. Assume that the countries have identical, homothetic preferences. a. Which country is exporting good Y? (A, B, both, or neither) b. Draw the point at which Country B is producing in the initial equilibrium, and label it € P1B. c. Suppose now that the labor force in Country A becomes larger, so that it becomes able to produce at the point shown as € P2A (just there; no higher). Draw into the figures the following: i. The new production possibility frontier of Country A ii. The new consumption point of Country A and label it € C2A iii. The new production point of Country B and label it € P2B d. As a result of this growth of Country A, which country produces the following (A, B, both, or neither): i. More X? ii. More Y? iii. Less X? iv. Less Y? e. In terms of welfare per person, which country is made better off as a result of this growth? (A, B, both, or neither)Econ 441 Alan Deardorff Fall Term 2008 Final Exam Page 3 of 9 2. (7 points) In each of the situations described below, which country (A, B, both, or neither) has a comparative advantage in good X? a. Country A is twice as productive as Country B in producing good X and three times as productive in producing good Y. b. Country B uses twice as much labor per unit of good X and three times as much labor per unit of good Y, compared to country A. c. After starting with identical productivities in both sectors in both countries, Country A’s productivity in both sectors doubles, while Country B’s productivity remains unchanged. d. Both countries require 10 units of labor per unit of good X. Country B has an absolute advantage, compared to Country A, in producing good Y. e. Autarky prices are € PXA= $4.00, € PYA= $8.00, € PXB= $2.00, € PYB= $1.50 f. Production possibilities and preferences appear as follows: g. Production possibilities and preferences appear as follows:Econ 441 Alan Deardorff Fall Term 2008 Final Exam Page 4 of 9 3. (9 points) The figure below shows the unit-value isoquants for three goods, X, Y, and Z, in a small open economy that faces world prices € pX, € pY, and € pZ respectively. Initially the country’s endowments of labor, € L1, and capital, € K1, are given by the point € E1. Add lines and labels to the figure as necessary to identify the following. Be sure to show enough so that we can tell how you got your results. a. With the initial endowments € E1: i. Labor employed in producing good X: € LX1 ii. Labor employed in producing good Y: € LY1 iii. Labor employed in producing good Z: € LZ1 iv. Capital employed in producing good Y: € KY1 v. The rental price of capital: € r1 b. Now suppose that the country’s endowment of capital grows, so that its endowment moves to the point shown as € E2. Now identify: i. Capital employed in producing good X: € KX2 ii. Capital employed in producing good Y: € KY2 c. Finally, suppose that the country’s labor force declines, its capital stock remaining what it was at € E2. Find the new endowment point in the figure at which the country would first produce only good Z, and label it € E3. d. One last question: Is the wage of labor at endowment € E2 higher, lower, or the same as at endowment € E1? _______________________Econ 441 Alan Deardorff Fall Term 2008 Final Exam Page 5 of 9 4. (7 points) The table below shows, in the four columns at the right, four of the models we have studied in the course. In the rows below are stated several properties or results that emerge most clearly from just one of these models. For each row, place a check mark in the column of the model to which it corresponds. Small-country, 2-good H-O Model Small-country Standard Specific Factors Model Duopoly Model External Increasing Returns Model Intraindustry trade Rybczynski Theorem Factor-price insensitivity Increase in a country’s labor force (only) causes it to produce more of every good. Multiple equilibria Country may be worse off with free trade than in autarky Increase in price of a good must benefit owners of capital in that industryEcon 441 Alan Deardorff Fall Term 2008 Final Exam Page 6 of 9 5. (11 points) The figure shows supply and demand curves for a good within a small country, drawn on a grid so that you can see the prices and quantities. With free trade, the country faces a world price of $6 for the good. It then levies a 100% ad valorem tariff. In the figure, draw lines showing the prices and quantities of the good in the country under free trade and with the tariff. Then fill in the table below with the requested numerical quantities and values. (If possible, your answers will be graded based on how you’ve drawn the figure.) a. With free trade Quantity supplied Quantity imported b. With a 100% tariff Domestic price Quantity demanded Quantity imported Tariff revenue c. Welfare effects of moving from free trade to tariff (specify + or – as well as the number) On suppliers On demanders On country as a wholeEcon 441 Alan Deardorff Fall Term 2008 Final Exam Page 7 of 9 6. (7 points) Consider the two-good general equilibrium model shown at the right, of a country that, with free trade, imports good X and exports good Y. Consumer preferences in the country are homothetic. The country now levies an import tariff that is not