Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

SEMESTER 2 EXAMINATIONS 2017-18

ECON6016 International Trade

Section A

A1 (Gains from Trade, and Brexit) "If markets work well, everybody gains from trade". When feasible, draw a Ögure in support of each of your answers below.

(a) Under which assumptions is this assertion true? [9]

(b) Provide a graphical proof of this assertion, distinguishing producersífrom consumersígains from trade. [9]

(c) Thinking about the UK and the EU, could you cite one potential reason leading the UK population to vote for íexiting the EUí? Would a ímore open and truly global UKí help the UK population? Please explain. [Hint: think about the limitations in the implementation of redistribution schemes, such as the one proposed by Dixit and Norman (1980)] [8]

(d) Thinking about the UK and the EU, can you provide an estimate of the e§ect on UKís GDP of completely íexiting the EUí? Who can be expected to gain and who can be expected to lose from íBrexitíwithin the UK? [8]

A2 (Trade Policy and Trump) Consider an economy composed of two countries, Home (eg. the UK) and Foreign (eg. the US). Describe and compare the welfare e§ects of a tari§ on Home imports of steel (in preparation to retaliate to Trumpís trade policy threat): -When feasible, provide a graph in support of each of your answers below.

(a) Under perfect competition, when Home is a small open economy [10]

(b) Under perfect competition, when Home is a large open economy [10]

(c) On the basis of your conclusions for (a) and (b), what would you advise in terms of trade policy response to the Home country Government? [13]

Section B

B1 (The Hecksher-Ohlin and the SpeciÖc-Factors Models) Suppose two countries, the UK and the US, use only capital and labour for production. The US has 2,000 units of capital and 900 units of labour and the UK has 800 units of capital and 200 units of labour. Both countries produce cars and educational services. In the UK, there are 500 units of capital and 100 units of labour employed in education provision. In the US, there are 900 units of capital and 600 units of labor employed in the car industry. When feasible, provide a graph in support of each of your answers below.

(a) Which country is labour-abundant? Which country is capitalabundant? Which industry is labour-intensive in the UK? Which industry is capital-intensive in the UK? In autarky, and assuming that both countries have identical preferences, which country would have the cheaper relative price of education? [10]

(b) Now, suppose the two countries trade with one another. What will happen to the relative price of education in the US and in the UK? What is the e§ect of free trade on labour in the US? On capital owners in the US? What is most likely to occur in terms of the production of cars in the US? And in the UK? And what are the e§ects of free trade on wages and rental on capital in the UK? [10]

(c) Suppose now that capital is immobile within industries in the short run (eg. because of prohibitive adjustment costs), both in the US and the UK, and that they decide to engage in international trade. How do your conclusions from parts (a) and (b) change? [13] B2 (The Ricardian Model) Suppose that in TRUMPLAND there are 300 workers. Its technology requires 1 worker-hour per unit of food (MP LF = 1) and 3 worker-hours per unit of cloth (MP LC = 31). In autarky, it employs 150 workers in each of the two industries. With free trade, it faces world prices of p  F = $10 per unit of food and p  C = $20 per unit of cloth. When feasible, draw a Ögure in support of each of your answers below.

(a) Suppose that in autarky, workers in both industries are paid $8 per hour. What are the autarky prices of food and cloth? What are the quantities of food and cloth produced each hour? What is the countryís GDP in autarky, measured in dollars per hour? [7]

(b) When the country opens to free trade, under the normal assumptions of the Ricardian model, what quantities of food and cloth will it produce? Which products will TRUMPLAND import and export? What is the wage of the workers in the food industry? What is the countryís GDP with trade, measured in dollars per hour? Comment. [7]

(c) Assume that people in TRUMPLAND want to consume food and cloth in the same proportion. What is the exact quantity of food exported and cloth imported under free trade? Is trade balanced? Why? [7]

(d) Suppose, contrary to the normal Ricardian Model assumptions, that when trade is opened, workers are unwilling or unable to change occupations, so that we continue to have 150 workers in each industry. What, then, is the countryís GDP, in dollars, and how does it compare to (i) the GDP measured at free trade prices (you obtained in part (c) when workers were mobile) and to (ii) the GDP measured at autarky prices (you obtained in part (a))? [7]

(e) What are the wages of the two groups of workers in part (d)? Brieáy explain the di§erences with the results obtained both un der autarky and under free trade when workers can freely move.