Econ 4261 International Trade Theory
ECON 4261: INTERNATIONAL ECONOMICS: Final Exam online, Spring 2024 ***I declare that I will complete this exam myself, without help from others, including any online sources except the course online pages.*** Signed (or type your name):_____________________________________________ Total points for this exam: 100. 1. Short Answer Questions (10 points each; 60 points total): 1.1. The table below gives information for two countries, A and B: Factor Endowments Country A Country B Labor Force (L) 45 20 Capital Stock (K) 15 10 i) Assuming that Good Y is capital intensive, which country will export it? Briefly explain. ii) True or False (briefly explain): “It is possible for a good to be both labor and capital intensive.” 1.2. Suppose Country C imports computers, a capital intensive good. i) Is Country C likely to capital abundant or labor abundant? Briefly explain. ii) What is the likely impact of trade on the real wage of workers in Country C? Briefly explain. iii) Suppose politicians in Country C suggest limits to trade. Such a policy would benefit which group, labor or capital owners? Briefly explain. 1.3. i) Explain the content of the RYB Theorem. Why is it surprising? ii) What does the RYB theorem imply about the long run impact on factor prices within a small economy that receives either new immigrants or new foreign direct investment of capital (FDI)? 1.4. i) True or False (explain): “In monopolistic or oligopolistic competition, when trade is opened, if the countries have similar tastes, technology, products, and costs, then the outcome is that no trade is possible.” Briefly explain. ii) True or False (explain): “Trade between states or regions within a country is much less likely to occur than trade across the country’s borders.” Briefly explain. 1.5. i) Why might a large country have a greater incentive to use trade restrictions? ii) Are there any arguments to suggest that following this temptation might not be a good idea? Briefly explain. 1.6. True or False: “The optimal tariff for a small country is zero.” Briefly explain. 2. (20 points) Country A and Country B have to decide whether to impose a tariff against the other. They payoff matrix below gives the payoff of each country for all possible cases (whether they impose the tariff or choose free trade). Each row in the matrix corresponds to Country A’s decision (strategy) and each column Country B’s decision (strategy). The payoff of Country A is stated first in each quadrant of the matrix. The payoffs equal the gain or loss of each country, compared to free trade. Country B Free Trade Free Trade Tariff 0, 0 -60, 20 20, – 60 -40, -40 Country A Tariff i) Find the Nash Equilibrium of this tariff game; explain how you were able to identify the equilibrium. What is the payoff of each country in the Nash Equilibrium? i) Assume that the two countries have chosen the policies indicated by the Nash Equilibrium. Does either country perceive a motivation to unilaterally (by itself) to change its policy decision? Why or why not? iii) Based on the Nash Equilibrium payoffs, can you find an argument in favor of a multilateral change in their trade policy? Would any multilateral change offer both countries a gain? Explain. 3. (20 points) Consider the following figure of Home country’s market for Good X. i) Is Home is a small or a large country in the world market for Good X? Briefly explain. ii) The figure indicates that Home has imposed a tariff (t) on imports of Good X. How high is the tariff? iii) How much does the tariff alter the behavior of the consumers and producers in Home? Indicate the changes in the quantity of domestic consumption, production and imports of Good X? Is the world price of Good X affected? iv) Who gains and who loses from the tariff in Home? To find out, determine the changes in consumer surplus (CS), producer surplus (PS) and tariff revenue as the country moves from free trade to the tariff equilibrium. Show the changes in the diagram and calculate the numerical values of them. v) Is Home better off or worse off as a consequence of the tariff (net effect of the tariff)? Briefly explain. vi) Given the impact of the tariff on the economy, why might the tariff be imposed in the first place?
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