Name:______________
SSII 2005, 160A
Final
Professor Farshid Mojaver
Part I: Multiple Choice Questions (35 points)
1.
A lower tariff on imported steel would most likely benefit
(a) foreign producers at the expense of domestic consumers.
(b) domestic manufacturers of steel.
(c) domestic consumers of steel.
(d) workers in the steel industry.
(e) None of the above.
2.
A problem encountered when implementing an “infant industry” tariff is that
(a) domestic consumers will purchase the foreign good regardless of the tariff.
(b) the industry may never “mature.”
(c) most industries require tariff protection when they are mature.
(d) the tariff may hurt the industry’s domestic sales.
(e) None of the above.
3.
The deadweight loss of a tariff
(a) is a social loss because it promotes inefficient use of resources.
(b) is a social loss because it reduces the revenue of the government.
(c) is not a social loss because it merely redistributes revenue from one sector to another.
(d) is not a social loss because it is paid for by rich corporations.
(e) None of the above.
4.
A policy of tariff reduction in the computer industry is
(a) in the interest of the United States as a whole and in the interest of computer producing
regions of the country.
(b) in the interest of United States as a whole but not in the interest of computer producing
regions of the country.
(c) not in the interest of the United States as a whole but in the interests of computer
producing regions of the country.
(d) not in the interest of the United States as a whole and not in the interests of computer
consumers.
(e) None of the above
5.
An important difference between tariffs and quotas is that tariffs
(a) raise the price of the good
(b) generate tax revenue for the government
(c) stimulate international trade
(d) help domestic producers
(e) None of the above
6.
The existence of marginal social benefits which are not marginal benefits for the industry
producing the import substitutes
(a) is an argument supporting free trade and non-governmental involvement.
(b) is an argument supporting the use of an optimum tariff.
(c) is an argument supporting the use of market failures as a trade-policy strategy.
(d) is an argument rejecting free trade and supporting governmental involvement.
(e) None of the above.
7.
The domestic market failure argument is a particular case of the theory of
(a) the optimum, or first-best.
(b) the second best.
(c) the third best.
(d) the sufficing principle.
(e) None of the above.
8.
The simple model of competition among political parties long used by political scientists
tends to lead to the practical solution of selecting the
(a) optimal tariff.
(b) prohibitive tariff.
(c) zero (free-trade) tariff.
(d) the tariff rate favored by the median voter.
(e) None of the above.
9.
The fact that trade policy often imposes harm on large numbers of people, and benefits only
a few may be explained by
(a) the lack of political involvement of the public.
(b) the power of advertisement.
(c) the problem of collective action.
(d) the basic impossibility of the democratic system to reach a fair solution.
(e) None of the above.
10.
Today U.S. protectionism is concentrated in
(a) high tech industries.
(b) labor-intensive industries.
(c) industries in which Japan has a comparative advantage.
(d) computer intensive industries.
(e) capital-intensive industries.
11.
The reason protectionism remains strong in the United States is that
(a) economists can produce any result they are hired to produce.
(b) economists cannot persuade the general public that free trade is beneficial.
(c) economists do not really understand how the real world works.
(d) the losses associated with protectionism are diffuse, making lobbying by the public
impractical.
(e) None of the above.
12.
General equilibrium considerations lead to the realization that import-substituting policies
have
an effect of
(a) Discouraging exports.
(b) Encouraging exports.
(c) Encouraging an efficient use of a country’s resources.
(d) Generating large tariff revenues for the government
(e) None of the above.
13.
Historically those few developing countries which have succeeded in significantly raising
their
per-capita income levels
(a) Did not accomplish this with import-substituting industrialization.
(b) Did accomplish this with import-substituting industrialization.
(c) Tended to provide heavy protection to domestic industrial sectors.
(d) Favored industrial to agricultural or service sectors.
(e) None of the above.
14.
The growth successes of the high performance Asian economies
(a) Supports the belief that economic development requires import substitution policies.
(b) Rejects the belief that export-oriented industrialization is likely to promote economic
development.
(c) Rejects the belief that economic development requires import substitution policies.
(d) Suggests that free trade policies are required for successful economic development.
(e) None of the above.
15.
The infant industry argument is that
(a) Comparative advantage is irrelevant to economic growth
(b) Developing countries have a comparative advantage in agricultural goods.
(c) Developing countries have a comparative advantage in manufacturing.
(d) Developing countries have a potential comparative advantage in manufacturing.
(e) None of the above.
16.
The infant industry argument calls for active government involvement
(a) Only if the government forecasts are accurate.
(b) Only if some market failure can be identified.
(c) Only if the industry is not one already dominated by industrial countries.
(d) Only if the industry has a high value added.
(e) None of the above.
17.
The existence of positive externalities due to the impossibility of full appropriability
(a) Supports the conclusions of the Heckscher-Ohlin model.
(b) Rejects the usefulness of government protectionism.
(c) Supports the concept that the government should support only high tech industries.
(d) Provides support for government protectionism.
(e) None of the above.
18.
The United States
(a) Does not provide more support for R&D as compared to other forms of investment.
(b) Provides support for R&D by imposing high tariffs on R&D intensive products.
(c) Provides support for R&D by providing direct subsidies for such activities.
(d) Provides support for R&D through tax legislation.
(e) None of the above.
19.
In the Brander-Spencer model the subsidy raises profits by more than the subsidy because
of
(a) The “multiplier” effect of government expenditures.
(b) The military-industrial complex.
(c) The forward and backward linkage effects of certain industries.
(d) The deterrent effect of the subsidy on foreign competition.
(e) None of the above.
20.
If firms in an industry are generating knowledge that other firms can use without paying for
it, this industry is characterized by
(a) Social costs that exceed private costs.
(b) Social benefits that exceed private benefits.
(c) Social costs that exceed social benefits.
(d) Private benefits that exceed social benefits.
(e) None of the above.
21.
It is argued that high-tech industries typically generate new technologies but cannot fully
appropriate the commercial benefits associated with their inventions or discoveries. If this
is true then in order to maximize a country’s real income, the government should
(a) Tax the high-tech firms.
(b) Subsidize the high-tech firms.
(c) Protect the high-tech firms.
(d) Both (b) and (c)
(e) None of the above.
22.
The belief that U.S. subsidies will evoke foreign repercussions is called the ________
argument.
(a) Technological spillover
(b) Foreign multiplier
(c) Beggar-thy-neighbor
(d) Positive externality
(e) None of the above.
23.
When one applies the Heckscher-Ohlin model of trade to the issue of trade-related income
redistributions, one must conclude that North South trade, such as U.S.-Mexico trade,
(a) Must help low skill workers on both sides of the border.
(b) Is likely to hurt high-skilled workers in the U.S.
(c) Is likely to hurt low-skilled workers in the U.S.
(d) Is likely to hurt low-skilled workers in Mexico.
(e) None of the above.
24.
When one applies the Heckscher-Ohlin model of trade to the issue of trade-related income
redistributions, one must conclude that North South trade, such as U.S.-Mexico trade,
(a) Must help low skill workers on both sides of the border.
(b) B. Is likely to hurt high-skilled workers in the U.S.
(c) Is likely to involve higher overall national economic gains that will be greater than any
harm done to low-skilled workers in the U.S.
(d) Is likely to hurt low-skilled workers in Mexico.
(e) None of the above.
25.
External economies of scale arise when the cost per unit
(a) rises as the industry grows larger.
(b) falls as the industry grows larger rises as the average firm grows larger.
(c) falls as the average firm grows larger.
(d) remains constant.
(e) None of the above.
26.
Internal economies of scale arise when the cost per unit
(a) rises as the industry grows larger.
(b) falls as the industry grows larger.
(c) rises as the average firm grows larger.
(d) falls as the average firm grows larger.
(e) None of the above.
27.
Where there are economies of scale, an increase in the size of the market will
(a) increase the number of firms and raise the price per unit.
(b) decrease the number of firms and raise the price per unit.
(c) increase the number of firms and lower the price per unit.
(d) decrease the number of firms and lower the price per unit.
(e) None of the above.
28.
The simultaneous export and import of widgets by the United States is an example of
(a) increasing returns to scale.
(b) imperfect competition.
(c) intra-industry trade.
(d) inter-industry trade.
(e) None of the above.
29.
International trade based solely on internal scale economies in both countries is likely to be
carried out by a
(a) relatively large number of price competing firms.
(b) relatively small number of price competing firms.
(c) relatively small number of competing oligopolists.
(d) monopoly firms in each country/industry.
(e) None of the above.
30.
A firm in monopolistic competition
(a) earns positive monopoly profits because each sells a differentiated product.
(b) earns positive oligopoly profits because each firm sells a differentiated product.
(c) earns zero economic profits because it is in perfectly or pure competition.
(d) earns zero economic profits because of free entry.
(e) None of the above.
31.
Intra-industry trade will tend to dominate trade flows when which of the following exists?
(a) Large differences between relative country factor availabilities
(b) Small differences between relative country factor availabilities
(c) Homogeneous products that cannot be differentiated
(d) Constant cost industries
(e) None of the above.
32.
The most common form of price discrimination in international trade is
(a) non-tariff barriers.
(b) Voluntary Export Restraints.
(c) dumping.
(d) preferential trade arrangements.
(e) None of the above.
33.
If the world attained a perfect Heckscher-Ohlin model equilibrium with trade, then
(a) workers in the labor abundant country would migrate to the capital abundant country.
(b) workers in the labor abundant country would wish to migrate to the capital abundant
country.
(c) workers in the labor abundant country would have no desire to migrate to the capital
abundant country.
(d) workers in the capital abundant country would wish to migrate to the labor abundant
country.
(e) workers in the capital abundant country would migrate to the labor abundant country.
34.
Multinational corporations may provide benefits to their home countries for the following
reasons except which one?
(a) Secure raw materials for the source country
(b) Allow for exports of products, which involve company-specific trade secrets
(c) Allow domestic firms to secure timely deliveries of commodities or products, which do
not enjoy a stable or deep market internationally
(d) Shift home country technology overseas via licensing
(e) None of the above.
35.
Direct foreign investment may take any of the following forms except
(a) investors buying bonds of an existing firm overseas.
(b) the creation of a wholly owned business overseas.
(c) the takeover of an existing company overseas.
(d) the construction of a manufacturing plant overseas.
(e) None of the above.
Part II
1-The Ricardian Model of Trade [12 points total, 2 pts each ]
1) Malaysia has 200 units of labor, while there are 400 units of labor in Indonesia. When they
produce, the countries have the following unit labor requirements.
Shirts
Cameras
1-1)
Malaysia
20
10
Indonesia
20
40
Which country has absolute advantage in shirt production and why?
1-2) In absence of trade, what is the opportunity cost of Shirts (in terms of Cameras) in
Indonesia?
1-3) For which product does Indonesia have comparative advantage?
1-4) Draw a graph showing production possibility frontier of Malaysia and Indonesia. Have
Shirt production of the horizontal axis and Camera on the Vertical axis.
1-5) What is the relative price of Shirts in each country before trade?
1-6) If world price of shirts to cameras were 1 what would be the world production of
Camera and Shirts? Which country would produce each?
Problem 2 (Trade in Perfectly Competitive Markets) [14 points, a, b , c 2 pts each, d 8 pts]
There is a three panel graph below. In the left hand panel are the demand and supply
curves in the Home country for some good Q. In the right hand panel are the demand and
supply curves for the Foreign country for the same good. Both Home and Foreign are
"large" countries.
(a) In the middle panel, draw the import demand (MD) and export supply (XS*) curves
for Home and Foreign, respectively. Be sure to label the curves.
(b) Label the equilibrium world price in free trade as PoW, and indicate quantities
consumed (QD) and produced (QS) in each country, as well as the quantity of good Q
traded (label this Mo).
(c) Suppose that Foreign imposes a specific export tax of $t. Show the new equilibrium
price in Home and in Foreign, plus the new level of good Q traded (label this M1). Also
indicate the new quantities produced and consumed in each country.
(d) Label the areas in the left hand panel. Relative to free trade,
i.
What is change in Home consumer surplus? (write down the area below)
ii.

What change in Home producer surplus?


iii.
What is the change in the Home government’s revenue?
iv.
What is the total change in Home’s welfare?



3. Trade Blocks [8 points: 2 points per statement]
Label each statement as True or False [T or F]
__________ Trade diversion represents the shifting of consumer purchases away from
domestic firms, towards imports.
__________ Trade creation has two benefits for the economy: one related to increased
consumer surplus, the other related to reduced production inefficiency.
_________ While trade blocks are allowed under WTO rules, they contradict the principle of
"Most Favored Nation" status.
____ _____ If the formation of a trade block reduces prices for consumers in the block, then
one can conclude that the formation of the trade block yields net benefits for the member
countries.
4. Strategic Trade Policy [6 points: 2 points per part.]
Consider the following payoff matrix for Airbus and Boeing. [12 points: 4 points per
part.]
a) Which company will enter the market?
b) Suppose both governments offer their respective company a subsidy of
$4(million). Which company will enter the market?
c) Suppose both governments offer their respective company a $10 million subsidy.
Which company will enter the market now?
5- A question on HO Model and Income Distribution [25 points]
Consider an increase in import tariff rates in a small capital abundant country. Analyze
the effects of this policy on the income distribution and the factor intensity of that
country in the following table. In answering the questions in the table use using the
following notation:
+
0
A
the variable increases in this step
the variable decreases in this state
the variable does not change
the variable change is ambiguous (i.e. it may rise, it may fall)
Domestic IMPort competing -EXP Price ratio
Short Impact
Medium Run
Long Run
+
+
+
Nominal wage in EXP sector: WEXP
Nominal rent in IMP competing sector: RIMP
Nominal rent in EXP sector: REXP
Real wage in IMP competing sector: WIMP
Real rent in IMP competing sector: RIMP
capital-labor ratio in IMP competing sector
National Welfare
nnnnnnnn
Consumer Welfare
Nnnnnnn
Welfare of the median voter welfare assuming
large income inequality
nnnnnnnnn
Welfare of the Median voter welfare assuming
no income inequality
nnnnnnn
Nnnnnnn
Could a free trade agreement with Mexico potentially hurt US welfare? What makes it more
likely for the FTA to be a success? In answering this question please make use of the concept of
Trade Creation and Trade Diversion.
Show that a tariff on imports of a foreign monopolist can improve welfare of home country.
Consider the long-run trade equilibrium in the monopolistic competition model as illustrated below.
Consider a situation where the foreign and domestic demand for a particular good decrease. For instance,
suppose that this is the market for cars and higher gasoline prices result in lower demand.
a)
In the Figure below and show what happens when this change in demand occurs. Specifically,
show which curve(s) shift.
P
D0/Nc
C
dc
mrd
AC
MC
Q
market demand curve, demand curve faced by the firm and mr curve shift to the right, as shown by D/Nc’,
d’ and mr’ curves.
b) If the old equilibrium is at point C, describe where the new long run equilibrium occurs, and what has
happened to the number of firms and the price they charge.
Problem
You are employed as an economic advisor of a presidential candidate. One of the issues
you need to take a stand is the threat of foreign imports to the domestic economy. Some
interest groups demand a substantial increase in the import tariff rates on such products.
a) What would your advice be if you were an economic and political advisor in US
and why?
b) How would your advice change if you were employed by a major party in India
given that income distribution is less equal in India and that India imports capital
intensive goods?
c) How would your advice change if you were employed by the government of
China, where income distribution is more equal but most of the enterprises are
state-owned?