a) Under the assumption that Obamacare is repealed, in terms of real income who will be the winners

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1 Professor Robert Staiger Spring 2016/17 Economics 39S: Final Exam Please be concise and to the point. Print your name on your exam and turn it in with your blue books. You have 2 hours (but I doubt you will need it). The exam has 100 points. Answer all 3 questions. You should spend the first 10 minutes reading the exam. Good luck! 1. (50 points) You have been hired as a summer intern at the Congressional Budget Office to work on two major economic policy issues currently under consideration by Congress and the Trump administration: health care and corporate tax reform. On your first day of work, your boss calls you into her office and explains that, while she had been thinking of these as separate issues, a recent New York Times Op-Ed by Paul Krugman has made her think that health care and tax reform may be more connected than they first appear. As she describes to you, the following passage from Krugman s May Op-Ed helped her draw the connection: Until 2014, there was basically only one way Americans under 65 with pre-existing conditions could get health insurance: by finding an employer willing to offer coverage. Some employers were in fact willing to do so But what if you wanted to change jobs, or start your own business? Too bad: you were basically stuck Then Obamacare went into effect, guaranteeing affordable care even to those with pre-existing medical conditions. This was a hugely liberating change for millions. Even if you didn t immediately take advantage of the new program to strike out on your own, the fact was that now you could. But maybe not for much longer. Trumpcare the American Health Care Act would drastically reduce protections for Americans with pre-existing conditions. And even if that bill never becomes law, the Trump administration is effectively sabotaging individual insurance markets, so that in many cases Americans who lose employer coverage will have no place to turn which will in turn tie those who do have such coverage to their current employers. In effect, as your boss explains, Krugman is arguing that workers with pre-existing medical conditions were tied to their sector of employment prior to the passage of Obamacare, that Obamacare freed these workers to move between sectors without regard for the healthcare consequences of switching jobs, and that the repeal of Obamacare would return these workers to a world in which they are again tied to their sector of employment. Your boss asks you to look into whether these labor-market implications of the repeal of Obamacare could have important implications for the Trump administration s efforts to use corporate tax reform to induce greater capital investment in the United States and ultimately stimulate the U.S. manufacturing sector. For this analysis, you may assume that the U.S. is a small economy trading freely with the rest of the world. You may also assume that under Obamacare, the U.S. is a Heckscher-Ohlin economy that imports laborintensive Clothing and exports capital intensive Food. And you may assume that if Obamacare is repealed, the U.S. will become a Specific Factors economy that still imports Clothing and exports Food, but now with clothing-workers specific to the Clothing sector and food-workers specific to the Food sector and with only capital mobile between sectors. Finally, you may assume that the impact of the corporate tax reform under consideration can be modeled as simply a given increase in the size of the U.S. capital stock (the same increase whether or not Obamacare is repealed), and that the U.S. produces both Food and Clothing before and after the increase in the U.S. capital stock. Your job is to answer the following questions for your boss: a) Under the assumption that Obamacare is repealed, in terms of real income who will be the winners

2 and who will be the losers from this corporate tax reform among the original U.S. factors of production (i.e., among the workers in the U.S. and the owners of the original U.S. capital stock)? b) Under the assumption that Obamacare is not repealed, in terms of real income who will be the winners and who will be the losers from this corporate tax reform among the original U.S. factors of production (i.e., among the workers in the U.S. and the owners of the original U.S. capital stock)? c) Will the impact of this corporate tax reform on U.S. production in the Clothing sector be larger if Obamacare is repealed, or larger if Obamacare is not repealed? 2. (30 points) We observed in class that the IT revolution may have diminished the degree to which technologies are different across countries. Within the context of the Continuum-of-Goods Ricardian Trade model studied in class, suppose we represent this as a flattening of the A(z) curve, so that as a result of the IT revolution the A(Z) curve swivels around the original marginal good z and becomes a flatter (but still downward sloping) curve. With the above representation of the IT revolution, would we expect the IT revolution to magnify or rather diminish the impact of a given increase in the foreign labor force L* on (i) the competitiveness of the domestic economy and (ii) the purchasing power of the domestic wage with respect to the range of goods exported by the foreign country prior to the increase in foreign labor force? (Note: You are only asked about the purchasing power with respect to this particular range of goods). 3. (20 points) Over the past three decades, the real wage of unskilled workers has fallen, the skill premium (i.e., the wage of skilled labor relative to unskilled labor) has risen, and production in the United States has become more skilled-labor intensive. In the debate over the role of trade in these developments, it is often observed that if increased import competition were solely responsible for the fall in U.S. unskilled real wages, we would see production in the United States becoming less skilled-labor intensive over this period, not more. Assuming that the United States is a two-factor (skilled labor and unskilled labor) two-good (skilled-labor intensive Food and unskilled-labor intensive Clothing) small Heckscher-Ohlin economy importing Clothing and exporting Food and trading freely with the rest of the world, demonstrate that the above observation is correct. For extra credit (5 points), depict an across-the-board technological advance in the United States (a downward shift in both the Food and Clothing isoquants in the United States) which, when combined with increased import competition, could account for all three of these developments, and discuss what kind of technical change is implied by your answer.

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