Class 18
March 29
Last class:
3. International trade theory
Quiz 5
Today:
Result of Quiz 5
Result of Problem set 2
4. Trade policies of importing nations
Review for the midterm exam
Next class:
Midterm exam (9:20am – 10:50pm)
Reading:
3. International trade, comparative advantage …
Class 18
March 29
7
Important date:
Midterm exam (chapters 1 – 3), Tuesday, April 3
9:20am – 10:50am
Result of Quiz 5
N = 35
Range = 6.5 – 10
Average = 8.72
1. Absolute advantage vs. comparative advantage
2. Two statements
3. Productivity data of two nations and two products
(a) Absolute advantage
(b) Comparative advantage
(c) Should they trade?
(d) How to draw a PPF?
4. Production cost data of two nations and two products
(a) Absolute advantage
(b) Comparative advantage
(c ) Should they trade?
Result of Problem set 2
N = 36
Range = 41 – 99.5
Average = 86.6
4. Trade policies of importing countries
4.1. Major types of import barriers
4.2. Reasons for import barriers
4.3. Effects of specific import policies
4.4. Related issues
3.7. Exchange rate and its determination
3.7.1. Exchange rate: the ratio at which two
currencies are traded (the price of one currency
in terms of another)
e.g., 1 US dollar = 1.56 Canadian dollars
1 US dollar = 7.90 Chinese yuans
3.7.2. Importance of exchange rate in trade
3.7.3. History of money (currency)
4.1. Major types of import barriers
(a) Import tax (tariff)
-- Fixed amount per unit (e.g., $0.5 per unit)
-- A percentage of the price (e.g., 5%)
-- A combination of the two
(b) Import quota
-- Quota on total import
-- A quota on a country basis
(c) Tariff rate-quota: a combination of tariff & quota
e.g., First 200 mmt, 2% tariff
201 -- 500 mmt, 4%
Above 500 mmt, 6%
4.1. Major types of import barriers
(d) Other import restrictions
-- State trading (e.g., China’s grain import)
-- Technical restrictions
(e.g., high quality standards)
4.2. Major reasons for import barriers
(a)
(b)
(c)
(d)
(e)
Redistribution of welfare
National security
Protest new industries
Protect producers and farmers
Other reasons (e.g.,health, public safety, etc.)
4.3. Effects of specific import policies
(a) Small vs. large importer
(b) A graphic analysis
-- A small importer
-- A large importer
(c) A mathematical analysis
-- A small importer
Qd = 20 - 1 P
Qs = -1 + 2 P
ED = Qd - Qs = 21 - 3P
ES faced by the importer: Pw = 5
Price after trade =
Quantity of import =
Change in CS =
Change in PS =
Gains from trade =
4.3. Effects of specific import policies
(c) A mathematical analysis
-- A large importer
Qd = 20 - 1 P
Qs = -1 + 2 P
ED = 21 - 3P
ES faced by the importer: ES = -1.5 + 2 P
Price after trade =
Quantity of import =
Change in CS =
Change in PS =
Gains from trade = change in (CS+PS) =
4.3. Effects of specific import policies
(d) Impacts of an import tax: a small importer
Qd = 20 - 1 P Qs = -1 + 2 P
ES faced by the importer: Pw = 5
--------------------------------------------------------------------------------------------------Import P* Qs Qd CS PS Tax CS+PS+Tax
--------------------------------------------------------------------------------------------------No trade
0
7 13 13 84.5 42.25 0 126.75
Free trade w/ no transp. cost 6
5 9 15 112.25 20.25 0 132.50
An import tax of $1 per unit 3
6 11 14 98
30.25 3 131.25
---------------------------------------------------------------------------------------------------
3. International trade theory
3.1.
3.2.
3.3.
3.4.
3.5.
3.6.
3.7.
Simple examples: two-person cases
Absolute and comparative advantages
Trade between two countries
The sources of comparative advantage
Other explanations for international trade
Measurement of the gains from trade
Exchange rate and its determination
Midterm exam
1. What will be covered in the exam?
2. What will be the format?
3. What are the study materials and practice problems?
4. What do you need to bring to the exam?
5. Suggestions
Midterm exam
1. What will be covered in the exam?
-- Chapter 1 -- Chapter 3
-- Approximate distribution:
Chapter 1
Chapter 2
Chapter 3
15 - 20%
35 - 40%
35 - 40%
Midterm exam
2. What will be the format?
-- Multiple-choice questions (about 25-30 points)
(e.g., interpretation of GNP)
-- Short-answer questions (25-30 points)
-- Problems (about 25 - 35 points)
(e.g., calculate equilibrium price and quantity)
-- Graphical analysis (about 15 - 25 points)
(e.g., draw a graph and calculate CS and PS)
Midterm exam
3. What are the study materials and practice
problems?
Quiz 1 to Quiz 5
Class exercises
Take-home exercises
Class examples
Lecture notes (class 01 -- class 18)
Problem sets
Reading for chapters 1, 2 and 3
Midterm exam
4. What do you need to bring to the exam?
-- Your calculator
-- A ruler will be helpful
-- No formula sheet is needed
Midterm exam
5. Suggestions
a. Go over each quiz and make sure you understand
and know how to answer each question in each quiz
b. Go over each class exercise and take-home exercise
and make sure you understand and know how to
answer every question
c. Go over the lecture notes, especially for the classes
you missed
d. Go over your problem sets and Chapters 1-3 readings
e. Study hard and feel confident!