ECN 481/581, Winter 1997

Prof. Bruce Blonigen

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Multiple choice - pick the most appropriate answer (5 points each)

1) The main empirical fact that caused economists to reconsider traditional trade theory such as Heckscher-Ohlin and develop new trade theory based on differentiated products is

a) "Dutch" disease.
b) because there are more than two countries in the world.
c) inter-industry trade.
d) intra-industry trade.

2) Labor migration can affect comparative advantage, and hence trade flows, in

a) neither the Ricardian model, nor the Heckscher-Ohlin model.
b) the Ricardian model, but not the Heckscher-Ohlin model.
c) the Heckscher-Ohlin model, but not the Ricardian model.
d) both the Ricardian model and the Heckscher-Ohlin model.

3) If two countries trade, one "small" and the other "large," then

a) neither country will gain from trade.
b) it's possible for the small country to put an optimal tariff on its imports.
c) the small country will gain more from trade than the large country.
d) the international price will end up being the small country's autarky prices.

4) When Holland discovered natural gas, the increased production in natural gas caused its other manufacturing sectors to decline. This "Dutch" disease is explained by

a) the Heckscher-Ohlin theorem.
b) the Rybczynski theorem.
c) the Stolper-Samuelson theorem.
d) the Factor Price Equalization theorem.

5) Which of the following reasons for "dumping" would be of most concern to economists and make them likely to support some policy action against the foreign firm?

a) learning-by-doing effects.
b) price discrimination.
c) foreign subsidization.
d) predatory pricing.

6) In a two-country, two good Ricardian world of trade, the move from autarky to free trade results in

a) immiserizing growth for either country if it is large.
b) welfare losses for one country.
c) the elimination of at least one sector in one country.
d) factor price equalization.

7) The presence of an export subsidy

a) will increase the price of the export good in the home market and decrease the utility of home consumers.
b) will decrease the price of the export good in the home market and increase the utility of home consumers.
c) will lead to a net gain in welfare in the home market since producer surplus goes up.
d) can lead to a higher import price in the importing country in the large country case.

8) If two countries remove all tariffs between them and set up a common tariff against the rest of the world, these two countries have formed:

a) a free trade area.
b) a customs union.
c) a common market.
d) an economic union.

9) Which one of the following groups gains when a small country imposes a tariff?

a) domestic consumers.
b) foreign exporters.
c) domestic producers.
d) none.

10) Foreign direct investment occurs in the U.S. when

a) a person from a foreign country buys U.S. government bonds.
b) a foreign firm buys U.S. government bonds.
c) a foreign firm fully acquires a U.S. firm.
d) a foreign firm donates money to a U.S. charity.

Answer questions 11-14 by filling in the blanks (3 points per blank)

11) With just a few words, list where the source of comparative advantage between countries arise in the following models:

a) Heckscher-Ohlin: _________________________________
b) Ricardian: _________________________________
c) Imperfect Competition Trade Models: _________________________________

12) List the two sources of gains from trade in the imperfect competition trade model.

a) _________________________________________
b) _________________________________________

13) List 3 different arguments for protection (at least in certain circumstances).

a) _____________________________
b) _____________________________
c) _____________________________

14) List two reasons why foreign firms may decide to sell their product for a lower price in the foreign market, than in their own market.

a) ______________________________________
b) ______________________________________

The Effect of Foreign Aid on Trade and Growth: Questions 15- 21.

15) In panel B above, redraw all the information from panel A, noting that the two goods have changed axis (In panel B, beef is on the horizontal axis, not the vertical axis).

16) Would trade ever cause a country to completely specialize in one good or the other, given the graph in panel A? Why or why not?

17) Now focus on panel A and assume that the country involved is Ghana.

What does Ghana export? _________________ What does Ghana import? _______________

18) Suppose that Sweden gives Ghana foreign aid to develop its peanut industry to an even greater extent. This aid is used wisely in Ghana and it experiences growth in its peanut industry. Draw this in panel A assuming that the international terms of trade does not change.

19) If this is the Heckscher-Ohlin model, explain what must happen to domestic output of the two goods and when there is growth in the peanut sector and international prices stay constant.

Output of Beef: ___________________ Output of Peanuts: _________________________

What theorem explains this? ___________________________________________________

20) Now suppose Ghana is a "large" country when it experiences growth in its peanut sector. What will happen to its terms of trade with growth in its peanut sector?

21) Explain what will happen to Ghana's overall welfare when it has this growth in its peanut sector?

Trade Policy - The Effects of an Export Tax. Questions 22-29

Kuwait is a "small" country in terms of its effect on international markets and its main export good is oil. Suppose the government of Kuwait decides it wants to generate revenue by taxing oil exports. Figure 2 below diagrams the domestic oil market in Kuwait and the effects of the proposed export tax.

22) With the export tax, the doemstic price of oil in Kuwait will go down from P* to P_D (see figure 2). Explain why this is true.

23) Which lettered regions in figure 2 represent the gain or loss to consumer surplus? _______

Calculate the change to consumer surplus:

24) Which lettered regions in figure 2 represent the gain or loss to producer surplus? _______

Calculate the change to producer surplus:

25) Which lettered regions in figure 2 represent the tax revenue collected by the government of Kuwait? _______

Calculate the tariff revenue collected:

26) Which lettered regions in figure 2 represent the deadweight loss from this policy? _______

Calculate the deadweight losses:

27) Suppose the government of Kuwait imposes an export tax so large that the domestic price of oil goes from P* to P_A. Calculate the deadweight loss associated with this export tax:

28) If Kuwait was a "large" country on the international oil market, how would the export tax affect its terms of trade if at all?

TRADE POLICY AND OFFER CURVES. Questions 29-36 are based on figure 3 below.

29) Which offer curve is Nepal's (R or R*)? ________________

Which offer curve is India's? ________________

30) Suppose the Nepal government imposes an optimal import quota to help save jobs in its economy. In figure 3 above, draw in the country's new offer curve and the indifference curve associated with this optimal import quota.

31) What happens to the relative price of spices? _____________________

Is this a terms of trade gain or loss for Nepal? _____________________

Is this a terms of trade gain or loss for India? _____________________

32) What happens to Nepal's exports? ______________________ Show this on the graph.

How does this relate to Nepal's intended goal to save jobs in the economy?

33) Now suppose that Nepal negotiates with India and allows India to put a voluntary export restraint (VER) on wheat in place of Nepal's import quota on wheat. The export restraint will be placed at the same level of wheat trade volume as the import quota. Draw this VER policy by India on the offer curve diagram in a copy of figure 3 below.

34) Does Nepal's welfare increase or decrease because of the switch in policy from an import quota imposed by Nepal to a VER imposed by India?

35) Does India's welfare increase or decrease because of the switch in policy from an import quota imposed by Nepal to a VER imposed by India?

36) What does this say about the U.S. decision to allow Japan to impose an VER on auto exports to the U.S., rather than the U.S. imposing a tariff on auto imports from Japan?