Economics 182: Trade, Globalization and Development

Spring 2011

Midterm Exam
May 3, 2011

This exam consists of two sections:

Section

A: 16 Multiple Choice Questions; and Section B: 3 Long Questions. Answer all questions. Write your answers in the space provided following each question. Before you write your answer, read the question carefully. Show enough of your work so that your reasoning can be followed. You have 80 minutes.

Student Name: Student ID#:

Section I: Multiple Choice (48 points) Unit Labor Requirments Cloth Widgets Home 10 20 Foreign 60 30 1. Given the information in the table above, if it is ascertained that Foreign uses prison-slave labor to produce its exports, then home should (a) export cloth. (b) export widgets. (c) export both and import nothing. (d) export and import nothing. (e) All of the above. 2. A nation engaging in trade according to the Ricardian model will nd its consumption bundle (a) inside its production possibilities frontier. (b) on its production possibilities frontier. (c) outside its production possibilities frontier. (d) inside its trade-partner s production possibilities frontier. (e) on its trade-partner s production possibilities frontier. 3. Assume that labor is the only factor of production and that wages in the United States equal $20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the United States as compared to Japan if (a) U.S. labor productivity equaled 40 units per hour and Japan s 15 units per hour. (b) U.S. productivity equaled 30 units per hour whereas Japan s was 20. (c) U.S. labor productivity equaled 20 and Japan s 30. (d) U.S. labor productivity equaled 15 and Japan s 25 units per hour. (e) None of the above. 4. According to the Heckscher-Ohlin model, the source of comparative advantage is a country s (a) technology. (b) advertising. (c) human capital. (d) factor endowments. (e) Both A and B.

5. Given the following information:

If good S is capital intensive, then following the Heckscher-Ohlin Theory, (a) country A will export good S. (b) country B will export good S. (c) both countries will export good S. (d) trade will not occur between these two countries. (e) Insu cient information is given. 6. Refer to the table above. If you are told that Country B is very much richer than Country A, then the correct answer is (a) country A will export good S. (b) country B will export good S. (c) both countries will export good S. (d) trade will not occur between these two countries. (e) Insu cient information is given. 7. A country cannot produce a mix of products with a higher value than where (a) the isovalue line intersects the production possibility frontier. (b) the isovalue line is tangent to the production possibility frontier. (c) the isovalue line is above the production possibility frontier. (d) the isovalue line is below the production possibility frontier. (e) the isovalue line is tangent with the indierence curve. 8. If two countries with diminishing returns and dierent marginal rates of substitution between two products were to engage in trade, then (a) the shapes of their respective production possibility frontiers would change. (b) the marginal rates of substitution of both would become equal. (c) the larger of the two countries would dominate their trade. (d) the country with relatively elastic supplies would export more. (e) None of the above.

9. If a country began exporting product A and importing product B, then, as compared to the autarky (no-trade) situation, the marginal cost of product A will (a) increase. (b) decrease. (c) shift outward. (d) shift inward. (e) None of the above. 10. 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. 11. The Heckscher-Ohlin model predicts all of the following except (a) which country will export which product. (b) which factor of production within each country will gain from trade. (c) the volume of trade. (d) that wages will tend to become equal in both trading countries. (e) None of the above. 12. If PC =PF were to increase, (a) the cloth exporter would increase the quantity of cloth exports. (b) the cloth exporter would increase the quantity of cloth produced. (c) the food exporter would increase the quantity of food exports. (d) Both A and C. (e) None of the above. 13. A country will be able to consume a bundle which is not attainable solely from domestic production only if (a) the world terms of trade dier from its domestic relative costs. (b) the country specializes in one product. (c) the country avoids international trade. (d) the world terms of trade equal the domestic relative costs. (e) None of the above.

14. If points A and B are both on the production possibility frontier of a country, then (a) consumers are indierent between the two bundles. (b) producers are indierent between the two bundles. (c) at any point in time, the country could produce both. (d) Both cost the same. (e) The country could produce either of the two bundles. 15. If at point A on the production possibility frontier, and the community indierence curve cuts through point a from northwest to southeast, then the optimal autarky production bundle is (a) at point A. (b) to the right of point A. (c) to the left of point A. (d) to the northeast of point A. (e) to the southwest of point A. 16. If a country began exporting product A and importing product B, then, as compared to the autarky (no-trade) situation, the marginal cost of product A will (a) increase. (b) decrease. (c) shift outward. (d) shift inward. (e) None of the above.

Section II: Short Questions (52 points) 1. Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania s economy grew, and is now represented by the rightmost production possibility frontier in the gure below.

(a) [4%] If its point of production with trade was point c, would you consider this growth to be export-biased or import biased?

(b) [3%] How would this growth aect Albania s terms of trade?

2. Suppose the United States and Mexico are the only countries in the world, and labor is the only productive input. Suppose the technology of the two countries is characterized by the following input requirement table: TVs (X ) 6 hrs/unit 3 hrs/unit Computers (Y ) 4 hrs/unit 3 hrs/unit

Mexico United States

(a) [3%] Which country has absolute advantage in X ? In Y ? Explain.

(b) [3%] Determine the pretrade relative prices, i.e. the price of a television (X ) in units of computers (Y ) in each country?

(c) [3%] Calculate the opportunity cost of production of each good for both countries.

(d) [3%] Which country has comparative advantage in X ? In Y ? Explain.

(e) [3%] Suppose that each country has 60 hours of labor available. Draw the production possibility fronteir for each country and determine its slope.

(f) [3%] If Mexico and the United States form a free trade area, in what range would the terms of trade have to fall? Why?

(g) [3%] Suppose that PX = $4 and PY = $5. Determine the wage per hour in Mexico and United States under free trade.

3. Suppose that there are only two countries in the world: Home and Foreign, and the demand and supply curves for corn are as follow:
Home Price ($) Price ($) Price ($) International Market Foreign

18

14 12

4 5

Corn

11

14

Corn

y 4

Corn

(a) [3%] If there is no international trade, what will be the price of corn in Home?

(b) [3%] If there is no international trade, what will be the price of a corn in Foreign?

(c) [3%] If there is international trade between Home and Foreign, what will be the price of corn in the international market?

(d) [3%] If Home s exports 4 units of corn, nd x, y and z. Explain your answer.

(e) [3%] What is the change in total welfare at Home due to trade?

(f) [3%] What is the change in total welfare at Foreign due to trade?

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(g) [3%] What is the change in consumers welfare at Home due to trade?

(h) [3%] What is the change in consumers welfare at Foreign due to trade?

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Answers
Sort Questions: 1. a 2. c 3. a 4. d 5. b 6. b 7. b 8. b 9. a 10. d 11. c 12. b 13. a 14. e 15. b 16. a

Long Questions: 1. (a) If point c is the production point with trade, then Albania has a comparative advantage in good B. Therefore, from the shape of the new production possibility frontier (as compared to the original one), this is clearly an export-biased growth. (b) This would tend to worsen Albania s terms of trade. 2. (a) The U.S. has absolute advantage in both goods because it requires fewer resources to produce the same amount of goods. (b) In Mexico: PX 6 = = 1:5 PY 4 i.e. the price of a television is 1.5 computers. PX 3 = =1 PY 3 i.e. the price of a television is 1 computers.

In the U.S.:

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(c) In Mexico: Opportunity Cost of producing 1 unit of X =1.5 Y In Mexico: Opportunity Cost of producing 1 unit of Y =2/3 X In the U.S.: Opportunity Cost of producing 1 unit of X =1 Y In the U.S.: Opportunity Cost of producing 1 unit of Y =1 X (d) The U.S. has comparative advantage in X because, as can be seen from b), the autarky (pretrade) relative price of X is lower in the U.S. Similary, it can also be seen from c): the U.S. can produce X with lower opportunity cost. Mexico has comparative advantage in Y because it can produce Y with lower opportunity cost. (e) Mexico will completely specialize in the production of good Y. It will produce 60/4 = 15 units of Y, none of X. The U.S. will completely specialize in the production of good X. It will produce 60/3 = 20 units of X, none of Y. (f) The terms of trade must lie between the two autarky relative prices i.e. the rate of exchange for a television must be between 1 computer and 1.5 computers. If one television can be exchanged for less than 1 computer, the U.S. will not engage in trade with Mexico. If one television can be exchanged for more than 1.5 computers, Mexico will not engage in trade with the U.S. (g) Wage at Home = 4 3 Wage at Foreign = 5 4 3. (a) (b) (c) (d) $12 $18 $14 The international market represents the aggrigate supply and demand. Therefore, 4 + z = 11 ) z = 7

x + y = 11

In addition, we know that imports=exports. Therefore, x 4 = 4 x = 8 and y = 11 (e) (14 (f) (18 (g) (14 (h) (18 14) 4 + (18 14) (7 2 3) = 24 12) (5 2 4) = 1 14) (7 2 3) =8 12) (8 2 4) =4 8=3

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