Eastwood's ECO486 home page  Key

I've assembled some questions from old exams for you to practice. Most of these questions concern the HO Model from chapter 4. Don't forget to study your homework and worksheet questions as well. Note that our second exam will cover material through chapter 6, including the reading "Misconceptions Concerning  Comparative Advantage" and the article "Trade and Income Distribution: The Debate and New Evidence."  See the assignment calendar for a direct link to this article. See below for some questions related to this article.

See the assignment calendar for links to the solutions to the homework problems, and worksheets.

Any of the material that we have covered through 21-October may appear on the test. Try answering the questions below, then checking your answers against the Key (see link at the top of this page). You may also bring your answers to our review session (see assignment calendar for date & time).

   INTERNATIONAL ECONOMICS --  HO Model

Use about one-third page for each graph you draw. Label both axes clearly and don't forget to specify the units.

1. Consider the following data on the factor endowments of two countries, A and B:

a)       (10points.) Which country is capital abundant and why?

b)       (10points.) Which country is labor abundant and why?

c)       (10points.) Supposing that the good T is labor intensive relative to good S, which country will have a comparative advantage in the production of T? Explain your answer.

2.        Consider the following data on two countries, A and B:

a.       (5 points.) Which country is capital abundant and why?

b.       (5 points.) Which country is labor abundant and why?

c.       (5 points.) Supposing that the good T (toupees) is labor intensive relative to good S (Sombreros), which country will have a comparative advantage in the production of T? Explain your answer.

d.       (5 points.) Which country will have a comparative advantage in the production of S? Explain your answer.

e.       (5 points.) Which factors gain and which lose when trade is opened between the two countries? Explain carefully.

f.        (10 points.)  Draw two national supply and national demand diagrams to illustrate the autarky equilibria for each country and a possible international equilibrium. Label the autarky prices, the international price, and the relative quantities consumed and produced in each country. Describe the adjustment from autarky to free-trade equilibrium.

3.   Use a partial equilibrium analysis, i.e., supply & demand diagrams, to illustrate and describe the economic effects of a tariff on imports for a large country. In particular, show the effects on domestic production, domestic consumption, imports, prices, consumer welfare, producer welfare, government revenue, and overall (net) economic welfare. Qualify your overall conclusion, if necessary. (See chapter 6, your notes and worksheets.)

4.   Compare and contrast the nominal and effective rates of protection. (See chapter 6, pages 171-176.)

5.   Discuss how economies of scale affect the pattern and gains from trade. (See chapter 5, especially pages 142-3.)

      6.   If a scale economy is the dominant technological factor defining or establishing comparative advantage, then the underlying facts explaining why a particular country dominates world markets in some product may be pure chance, or historical accident.  Explain, and compare this with the answer you would give for the Heckscher-Ohlin model of comparative advantage. (See chapters 4, 5 and notes.)

7.   Quantitative/Graphing Problem -- for chapter six (save for exam three)

(See chapter 6.)If the demand curve is Pd= 14 - 0.1 Qd, the supply curve is Ps = 2 + 0.1 Qs in Home, and if the world price is $3, then, how many Widgets does Home produce and consume in autarky ?

In the absence of trade what is Home's consumer plus producer surplus?

With free trade and no tariffs, what  quantity of Widgets would Home import?

With a specific tariff of $3 per unit, what is the quantity of Widget that Home imports?

The nominal rate of protection provided by this tariff equals ______.

If the price of imported inputs used to produce widgets equals $2/widget, then the effective rate of protection of this tariff equals _______.

The loss of Consumer Surplus due to the tariff equals______________.

The change in Producer Surplus due to the tariff equals _____________.

The government will receive revenue of ______________ from the tariff.

The change in this country's welfare due to the tariff equals _______

The lowest specific tariff which would be considered prohibitive is ____________.

If the world price of widgets fell to $1, then Home could impose a pure-revenue tariff of up to $___.

A production subsidy of $______/widget would increase Home's widget output as much as the $3 tariff.

The change in Producer Surplus due to the subsidy equals _____________.

The government will spend ______________ on the production subsidy.

The change in this country's welfare due to the production subsidy equals _______

Illustrate and discuss the welfare effects of a production subsidy, compared to those of a tariff (Chapter 6 & notes).

Questions related to "Trade and Income Distribution: The Debate and New Evidence."

1. According to Cline, how can the HO model be used to explain wage differences?

2. What other factors could account for these trends?

3. What does the author find as the primary forces producing these differences?

4. Given his findings, what policy recommendations does the author make?

Please write your own answers based on your own reading of the article and our text before looking some suggested answers I've posted with the key.

TRUE/FALSE (Circle the correct answer. Explain your answer briefly.)

8.        T     F                      According to the Rybczynski theorem, if a country increases its endowment of capital and prices remain constant, then its output of both the capital and labor intensive goods will rise (chapter 4).

9.        T     F                      In the HO model, tastes are assumed to be identical across countries to rule out differences in demand determining the direction of trade (chapter 4).

10.     T     F                      The assumption that the two goods are made using different factor intensities raises the likelihood of incomplete specialization after trade begins (chapter 4). 

11.     T     F                      According to the factor price equalization theorem, free international trade will result in wages equaling rents worldwide (chapter 4).

12.     T     F                      According the Stopler Samuelson theorem, the scarce factor in any given country will lose from international trade (chapter 4).

13.     T     F                      Even if international trade hurts some people, the HO model predicts that free international trade improves the standard of living for the country as a whole (chapter 4).

14.  T    F                        Through intra-industry trade, a country can both reduce the number of products it produces and increase the variety of goods available to consumers (chapter 5).

The rest of these questions concern chapter six -- save them to practice for exam three

15.  T    F                        The optimal tariff for a small country is zero.

16.  T    F                        Firms that produce an export good gain from a tariff on their exports.

17.  T    F                        An increase in the tariff on semiconductors lowers the effective rate of protection of computer producers.

18.  T    F                        All countries tend to have about the same tariff levels.

19.  T    F                        US tariff revenue accounts for more than 30 percent of federal government revenue.

20.  T    F                        Free trade tends to increase the rate of economic growth.

21.  T    F                        Analysis of trade barriers, such as the US tariff on rubber footwear, shows that the cost to US consumers per job saved can be more than $100,000 per job.

22.  T    F                        Ad valorem tariffs are collected as a fixed sum per unit imported.

23.  T    F                     Generalized System of Preferences (GSP) tariff rates are often lower than Most-Favored Nation (MFN) tariff rates.

24.  T    F                     Higher protection raises the overall level of employment.

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