Homework 1
UCDavis, 160a, SSII 2010
Prof. Farshid Mojaver
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.
Adam Smith and gains from trade
Read excerpts from Adam Smith’s Wealth of Nations (posted on the class web page) to
answer the following questions.
1- How does Adam Smith measure the contribution of any individual to national wealth?
2- Adam Smith argues that social interest is promoted best when individuals pursue their
self-interest. What is meant by “social interest” and how is it measured?
3- How can pursuit of self interest lead to maximization of social interest?
4- Under what conditions pursuit of self interest can lead to the maximization of GDP?
5- Is GDP a good measure of social interest? Do you see any problems with this?
6- What is the source of gain from trade according to Adam Smith?
7- How does Adam Smith generalize the results he draws from domestic trade between
individuals to gains from trade between nations?
8- Does everyone gain from voluntary trade (discuss in absolute and relative terms)?
9- What enables an individual/a nation to produce something at a lower cost?
10- What are the sources of national advantages in trade?
11- If Great Britain can make good wine and lots of it if needed why should she import
it?
12- What are the two justifications for some level of protection of domestic industry
according to Adam Smith?
13- What was the major function of the act of navigation in GB?
14- How did the act protect the domestic industry of GB?
15- According to Adam Smith does it matter what or with whom you trade?
16- Why Adam Smith supports the act of Navigation despite his own argument that the
act reduces trade and the opulence of GB?
17- How can the defense industry benefit from this policy?
18- In addition to the defense argument made by Adam Smith do you see any other
reason for the act of navigation? Did the act actually lead to greater opulence in
addition to better defense?