Homework 1
UCDavis, 160a, Spring 2008
Prof. Farshid Mojaver
Introductory Issues
DIRECTIONS: As in the popular TV game show, you are given an answer to a question and you must
respond with the question. For example, if the answer is, "a tax on imports", then the correct question is,
"What is a tariff?"
1. of micro- or macro-economics, the one whose methods are mostly applied in an
international trade theory course.
2. of micro- or macro-economics, the one whose methods are mostly applied in an
international finance theory course.
3. term of French origin used to describe a total absence of government regulation.
4. term used to describe a situation in which a country does not trade with any other
country.
5. the two types of economic efficiency.
6. term given to the principle of redistribution between winners and losers.
7. name of the economist who once remarked, "In the long-run, we are all dead!"
8. term used to describe policies which raise domestic welfare while reducing
welfare in the rest of the world.
9. name given to a policy that shifts profits away from foreign firms towards the
domestic economy.
10. the premier controversy in international trade policy analysis.
Some Trade Terminology
1- What does autarky mean?
2- What is a “laissez faire” policy with respect to trade?
3- Is export promotion considered to be a “laissez faire” policy? If not then what is
it?
4- In the trade spectrum show autarky, free trade, export promotion, and a move
toward protectionism/trade liberalization.
5- What is protectionism? What is being protected and against what?
6- What is trade liberalization? What is being liberalized?
Pure Exchange Model
Consider two farmers, one with an endowment of 5 pounds of peaches, the other with an
endowment of five pounds of cherries. Suppose these two farmers meet daily and make a
mutually agreeable exchange of 2 pounds of peaches for 3 pounds of cherries.
a. Write down an expression for the terms of trade. Explain how the terms of trade
relates to the dollar prices of the two goods.
b. Consider the following shocks (or changes). Explain how each of these shocks may
influence the terms of trade between the farmers. Assume that each farmer's sole
interest is to maximize her own utility.
1. The cherry farmer arrives at the market with 5 extra pounds of cherries.
2. The peach farmer has just finished reading a book titled "How to Influence
People."
3. Damp weather causes mold to grow on 40% of the peaches.
4. News reports indicate that cherry consumption can reduce the risk of cancer.
The Ricardian Model
Problem 1: Use the information in the table to answer the following questions.
Beer
Pizza
Italian labor productivity
6 bottles/hour
6 pizzas/hour
German labor productivity
5 bottles/hour
3 pizzas/hour
a. Which country has the absolute advantage in beer? ... in pizza? Explain why.
b. Explain why Italy's comparative advantage good is the one it can produce "most best",
while Germany's comparative advantage good is the one it can produce "least-worse".
c. What autarky price ratios (PB/PP) would prevail in each country? Explain.
d. Explain how price differences signal the expansion and export of a country's
comparative advantage goods and the contraction and import of a country's comparative
disadvantaged goods.
e. What does the model suggest will happen to employment levels in the export and
import industries? In the model what happens to the overall level of unemployment in the
economy after a country moves to free trade? Explain briefly.