International Economics, 2024-25 - Assignment 4
Instructions for submission (partly changed from last year; not adhering to them means that your assignment
work will not be graded):
1.
The assignment must be done by two or three students and submitted electronically (which also allows
us to check for plagiarism).
2.
Make sure you specify which assignment it is.
3.
The assignments must not be handwritten, but typed out.
4.
List the group members in the top left corner of your assignment alphabetically using the format of this
example:
De Wakker, Martje, s7654321
Vallert, Mark, s1234566
Van Puk, Pietje, s1234567
This is important and helps us with filling in the grades given the strange way names are listed in
Brightspace.
5.
Only the first one of your group in the alphabet can and must submit the assignment electronically. So,
in our case, only Martje de Wakker.
6.
Start the name of the electronically submitted assignment with the surname of the first one in your group
(including any de, van der, O’, etc.). So in our case, it would be: “DeWakker, ...”.
7.
Neatly handmade graphs may be used. All graphs/figures/tables must, however, be placed where they
belong, i.e. not added as an appendix at the end.
8.
The questions must be deleted from your electronic submission. So, only the question numbers and the
corresponding answers will be submitted.
9.
It is crucial that you attend Feedback sessions for three reasons:
i. this will allow you to review your answers which is essential for your learning progress;
ii. you can check if your grade for your answers corresponds to the answers given in class;
iii. you can check, if your grade was registered; claims for forgotten grades can only be made during
the Feedback session in which the assignment is discussed.
Assignment questions start on the next page
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1. (10 points) During the first half of 2020, COVID-19 had a disastrous impact on GDP and
trade. Most countries saw dramatic declines in the amount of imports and exports and many
countries also witnessed negative GDP growth rates.
Use the standard trade model of Chapter 6 to explain and discuss the impact of negative GDP
growth on a country’s terms of trade and welfare. For convenience, assume that of the two
countries in the model in Chapter 6 only Home faces a negative growth rate. Foreign’s growth
rate is zero. Furthermore, Home has a comparative advantage in Cloth, as in the presentation
of the model in Chapter 6.
Make sure that you include appropriate drawings to support your analysis on the terms of trade
and welfare effects of negative growth in Home. Obviously, you should also explain your
answer clearly.
2. (10 points) The impact of Brexit on welfare and trade can be analysed by means of the
monopolistic competition model of trade with homogenous firms (Chapter 8: 200-205).
Particularly, the model can be used to show that Brexit implies a considerable difference in
(loss of) welfare gains from intra-industry trade between the UK and the European Union
(EU).
Use a graph such as Figure 8-4 in the book (adapted to the situation at hand) to show that if
Brexit means that the UK and the EU cannot longer trade with each other, this will imply a
much bigger loss in welfare for the UK than for the EU. Explain your answers and drawings
carefully.
3. (10 points) When a country that is large at the world market of a particular good sets import
tariffs, this has welfare consequences for itself and for the country it imports from (its trade
partner).
a) (5 pts.) Use the graphs belonging to the partial equilibrium framework for tariff analysis
to determine and explain the overall welfare effects of the imposition of an import tariff
by a large country for itself and for its trade partner. Explain your graph(s) and answer
carefully.
Countries may also use non-tariff measures such as import quota to protect domestic producers.
In fact, if the import quota and import tariff are equally restrictive in terms of limiting imports,
the domestic price effects will be the same for both measures. Yet there are also differences that
may be relevant for governments when deciding on which type of import-restricting measure to
use.
b) (5 pts.) Mention and explain at least two policy-relevant differences in effects on trade
and welfare for a domestic country setting an import quota rather than an (equally
restrictive) import tariff.
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