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TAMU ECON 452 - Second Midterm Exam

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Page 1Page 2Page 3Page 4Page 5Page 6Page 7Page 8Page 9Second Midterm Exam, Fall 2005HECKSCHER-OHLIN MODEL1-4 The United States is abundant in labor to land compared to Canada.Cloth production relatively intensively uses labor to land compared tofood. The countries have the same technology and relative demand. 1. Under free trade, the United States exportsa) foodb) clothc) food and clothd) food and sometimes clothe) cloth and sometimes food2. Under free trade, Canada exportsa) foodb) clothc) food and clothd) food and sometimes clothe) cloth and sometimes food 3. The United States produces more _____ than Canada.a) clothb) foodc) cloth relative to foodd) food relative to clothe) cannot tell from the information provided4. Opening up to trade, the price of _____ rises in the United States.a) clothb) foodc) cloth relative to foodd) food relative to clothe) cannot tell from the information provided5-8 Mexico is abundant in labor to land compared to the United States.Cloth production relatively intensively uses labor to land compared tofood. The countries have the same technology and relative demand.Each country produces both goods.5. Under free trade, the wage paid to labor in the United States isa) higher than the wage in Mexicob) lower than the wage in Mexicoc) the same as the wage in Mexicod) the same as the rent in Mexico e) the same as the rent in the United States6. Under free trade, the rent paid to land in the United States isa) higher than the rent in Mexicob) lower than the rent in Mexicoc) the same as the rent in Mexicod) the same as the wage in Mexico e) the same as the wage in the United States7. In the United States, who is hurt by free trade?a) workersb) landownersc) everyoned) no onee) depends on spending patterns8. In Mexico, who is hurt by free trade?a) workersb) landownersc) everyoned) no onee) depends on spending patternsSTANDARD TRADE MODEL9-12 Free trade prevails between the United States and China. China hascomparative advantage in cloth and the United States in food.Suppose China experiences economic growth (while the UnitedStates has no economic growth).9. In world markets, the relative price of cloth to food:a) risesb) fallsc) stays the samed) rises, if China’s growth is biased toward clothe) falls, if China’s growth is biased toward cloth10. The primary effect of economic growth on China is:a) benefitb) burdenc) noned) benefit, if China’s growth is biased toward clothe) burden, if China’s growth is biased toward cloth11. The secondary effect of China’s growth on the United States is aterms of trade:a) improvementb) deteriorationc) unchangedd) improvement, if China’s growth is biased toward clothe) deterioration, if China’s growth is biased toward cloth12. The secondary effect on China is a terms of tradea) improvementb) deteriorationc) unchangedd) improvement, if China’s growth is biased toward clothe) deterioration, if China’s growth is biased toward cloth13-16 Free trade prevails between the United States and Pakistan.Suppose the United States transfers one billion dollars to Pakistan.Pakistan spends more of every dollar on construction (and less onfood) than the United States.13. In world markets, the relative price of construction to food:a) risesb) fallsc) stays the samed) rises, if Pakistan has comparative advantage in foode) falls, if Pakistan has comparative advantage in food14. The primary effect of the transfer on Pakistan is:a) benefitb) burdenc) noned) benefit, if Pakistan has comparative advantage in foode) burden, if Pakistan has comparative advantage in food15. The secondary effect on the United States is a terms of trade:a) improvementb) deteriorationc) unchangedd) improvement, if Pakistan has comparative advantage in foode) deterioration, if Pakistan has comparative advantage in food16. The secondary effect on Pakistan is a terms of trade:a) improvementb) deteriorationc) unchangedd) improvement, if Pakistan has comparative advantage in foode) deterioration, if Pakistan has comparative advantage in foodFACTOR PROPORTIONS MODEL PROBLEMSProducing one yard of cloth requires 3 workers and 1 acre of land, whileproducing one pound of food requires 1 worker and 2 acres of land. Bothcountries have 90 workers; the United States has 80 acres of land, whileROW has 130. The price of food is always $16/pound; the price of cloth is$18/yard in the United States in autarky and $33/yard in both countriesunder free trade.1. Determine and compare the relative abundance of factors acrosscountries. Determine and compare the relative intensity of factor useacross goods. Determine the pattern of comparative advantage andthe pattern of trade.2. Construct the labor constraint (same for both countries). Constructthe U.S. land constraint. Determine the U.S. production bundle thatfully employs both factors.3. Construct the ROW land constraint. Determine the ROW productionbundle that fully employs both factors. Compare the relativeproduction of cloth to food across countries. Draw graph of factorconstraints, with food on the vertical axis. Indicate values for theendpoints and for the quantities produced in each country. 4. Construct the pricing equation for food (same always for bothcountries). Construct the U.S. pricing equation for cloth in autarky.Determine U.S. factor prices in autarky that allow both goods to bepriced at cost.5. Construct the pricing equation for cloth under free trade (same forboth countries). Determine the factor prices under free trade thatallow both goods to be priced at cost. Compare the U.S. relativefactor prices (wage relative to rent) under free trade to autarky. Drawgraph of pricing equations, with rent on the vertical axis. Indicatevalues for the endpoints and for the factor prices before and aftertrade. 6. Calculate and compare the proportional changes in the wage, rent,price of cloth, and price of food. In the United States, owners ofwhich factor would oppose a free trade agreement? How can thisgroup be identified, even in autarky?Second Midterm Exam Solutions, Fall 2005MULTIPLE CHOICE1b Under free trade, the United States exports cloth, its comparativeadvantage good.2a Under free trade, Canada exports food. 3c The United States produces more cloth relative to food than Canada4c Opening up to trade, the price of cloth relative to food rises in theUnited States.5c Under free trade, the wage paid to labor in the United States is thesame as the wage in Mexico.6c Under free trade, the rent paid to land in the United


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TAMU ECON 452 - Second Midterm Exam

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