Economics 340 International Economics Prof. Alan Deardorff First Midterm Exam. Form 0. Answers. October 24, 2018

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1 Page 1 of 16 (16) Eonomis 340 International Eonomis Prof. First Miterm Exam Form 0 Answers Otober 24, 2018 INSTRUCTIONS: READ CAREFULLY!!! 1. Please o not open the exam until you are tol to o so. NAME: Stuent ID No.: 2. PLACE YOUR NAME AND STUDENT ID NO. (THE EIGHT DIGIT NUMBER FROM YOUR M-CARD) ON THE EXAM AND ON THE SCANTRON SHEET. 3. Fin the FORM NUMBER above an enter it where it asks for KEY on the santron sheet. Be sure to fill in the bubbles. 4. This exam has 100 points an you have approximately 80 minutes to omplete the test. Chek that you have all 16 pages of the exam, inluing this over sheet. 5. Part 1 onsists of 25 multiple hoie questions worth 2 points eah. Answers to these shoul be marke on the santron sheet using a #2 penil. There are no penalties for guessing. 6. Part 2 onsists of short-answer questions for whih you must provie written answers on these sheets. Point values for questions in Part 2 are iniate in parentheses. Part 2 has 48 points total. 7. That leaves 2 points unaounte for. You will get these if (an only if) you put your name an ID number on both this exam booklet an the santron sheet, an if you enter the form number (see above) on the santron. 8. Goo luk!

2 Page 2 of 16 (16) FORM 0 Eonomis 340 First Miterm Exam Part 1: Multiple Choie (2 points eah) Selet the best answer of those given. Answers to this part shoul be marke on the santron sheet using a #2 penil. There is only one orret answer per question, an there is no penalty for guessing. 1. How ha US average tariffs on imports hange sine the en of Worl War II as of 2016? a. Although some tariffs ha fallen, others ha risen so that the average remaine approximately unhange. b. Beause of the unique position of the US in Worl War II, we ene the war with zero tariffs. Over time, these rose to about 10%.. US tariffs against other rih ountries remaine over 20%, but to help eveloping ountries we reue tariffs on their exports, so that our average tariff as of 2016 was just uner 12%.. As a result of US partiipation in trae negotiations, US average tariffs in 2016 were only about 1/10 as large as they were at the en of Worl War II. e. The US has been the worl s strongest hampion of free trae sine well before Worl War II, an our tariffs have been near zero, with only minor exeptions, ever sine. 2. What oes it mean that China's value ae as a perent of its exports is smaller than that of the US? a. That wages in China are lower than wages in the US. b. That China s urreny is unervalue.. That China s exports are proue with a bigger proportion of importe intermeiate inputs than are US exports.. That China has higher tariffs than the US oes, an this as value to China s exports that elevate them above US exports. e. That China exports mainly to the US, while the US mainly exports to Europe.

3 Page 3 of 16 (16) 3. In lass you saw that Singapore s exports are 115% of Singapore s GDP. That is possible beause a. Singapore reports more exports than it atually has. b. Reporte exports of Singapore are atually those of the entire Malay peninsula, inluing Malaysia.. GDP measures only value ae, while the value of exports inlues the value of intermeiate inputs that may have been importe.. A large part of Singapore s GDP is proue by the informal eonomy an is therefore unreporte. e. Pries of Singapore s exports are more than 20% higher than of the goos that it keeps for itself. 4. Whih of the following was the name of one of the GATT negotiating rouns onute before the WTO was reate? a. NAFTA b. Tokyo. Nixon. Seattle e. Doha b 5. By efinition, publi goos are a. exluable b. nonrival. perfetly ompetitive. provie by government e. importe b

4 Page 4 of 16 (16) 6. The term onitionality refers to a. the requirements that the IMF imposes on eveloping ountries in return for loans. b. the avantage that a ountry has in trae if its labor requirement per unit of output of a goo is less than that of all other ountries.. the tariff reutions that the US an EU expete from eveloping ountries in the Doha Roun in return for reuing agriultural subsiies.. the bribes that ustoms offiers in some ountries require before they let importe goos in. e. the rules in GATT that permit a ountry to treat another better than its most favore nation. a 7. Josh Bivens, in his assigne artile Marketing the Gains from Trae, argues several things. Whih is the following is not among his laims? a. The laim by the Peterson Institute that the US oul gain roughly 4% of GDP from trae liberalization is not generally aepte by eonomists. b. Estimates of trae barriers in servies are very unertain.. Trae is not benefiial to ountries as a whole.. Computer moels of the gains from trae typially ignore effets on the istribution of inome. e. Avoates of free trae have greatly exaggerate the benefits from trae. 8. Suppose that Japan an Korea require the amounts of labor shown in the table below for prouing one unit of steel an one unit of wine. Then a. Korea has an absolute avantage in wine. b. Japan has a omparative avantage in steel.. Korea has a omparative avantage in wine.. Japan has an absolute avantage in steel. e. All of the above. Country Goo Japan Korea Steel Wine 2 5

5 Page 5 of 16 (16) 9. The New Trae Theory iffers from the Riarian an Fator Proportions theories in that it allows for a. Workers in one ountry to be more proutive than workers in another. b. Average osts to fall as an inustry employs proportionally more of all fators of proution.. Firms to be perfetly ompetitive.. One ountry to export a goo that is not the same as the goo that another ountry exports. e. Firms that hoose not to maximize their profits. b 10. The Fator Prie Equalization result of the Heksher-Ohlin Moel implies that, a. All workers are equally proutive. b. If a ountry fails to trae, its skille workers will earn no more than its unskille workers.. Trae auses the return to human apital to be the same as the return to physial apital.. Free trae auses iential fators in ifferent ountries to be pai more nearly the same than they were in autarky. e. In orer for ountries to trae freely, they must tax wages so that firms in all ountries pay the same. 11. Whih of the following is likely to happen when a large ountry levies a tariff an woul not happen if a small ountry i the same? a. Domesti output of the protete goo rises b. Domesti eman for the protete goo rises. Domesti prie of the protete goo rises. Worl prie of the protete goo falls e. Government ollets tariff revenue

6 Page 6 of 16 (16) 12. What oul ause the effetive rate of protetion on a goo to be negative? a. A positive tariff on an input to prouing the goo, together with a zero tariff on the goo itself. b. A speifi tariff that is larger than its a valorem equivalent.. A tariff impose by a foreign ountry in retaliation against the home ountry s tariff.. Failure to ollet a tariff beause importers bribe ustoms offiers. e. An import quota that is set larger than the quantity of imports that woul enter uner free trae. a 13. The iagram below shows supply an eman urves for the same goo in two ountries, A an B. Base on the pries an areas labele there, a. Country B has a omparative avantage in this goo. b. The autarky prie in Country A is P 2.. Moving from autarky to free trae makes emaners in Country B better off by the amount +.. Moving from autarky to free trae makes suppliers in Country A worse off by the amount a+b. e. All of the above. P Country A S P Country B S P 2 a b P 3 P 1 D D Q Q

7 Page 7 of 16 (16) 14. Whih of the following is not a NTB? a. VER. b. Tariff-rate quota.. Variable levy.. National treatment e. Disriminatory prout stanar 15. Suppose that a small ountry is initially importing a goo subjet to a quota, an that the omesti prie of the goo is higher than the worl prie. If the worl prie of the goo now falls, what will happen? a. The omesti prie of the goo will fall. b. The quantity of imports of the goo will rise.. The tariff equivalent of the quota will rise.. The quota rents will fall. e. All of the above. 16. The politial-eonomy explanation of why ountries have positive tariffs, summarize in the phrase protetion for sale, says that a. Legislators provie tariff protetion to inustries in response to politial ampaign ontributions. b. Importers pay bribes to ustoms offiers to let them pay tariffs that are lower than legally require.. Protetion is provie by import quotas that are autione off to the highest bier.. Inustries seeking protetion from imports pay bribes to ustoms offiers to get them to harge tariffs higher than legally require. e. Insurane ompanies sell poliies that promise to pay any tariff harges on trae goos. a

8 Page 8 of 16 (16) 17. Aoring to the optimal tariff argument, a. A tariff is the easiest way for a government to raise revenue. b. A tariff an benefit a large ountry by ausing the worl prie of the importe goo to fall.. The best tariff is one that raises the ost of importe goos to equal the ost of omestially proue goos.. The best time to levy a tariff is shortly after onsumers have ome to epen on imports. e. Workers shoul be given extene unemployment ompensation if they lose their jobs beause of ompetition from imports. b 18. Anti-umping uty is a. A tax on imports set equal to the ifferene between their prie in the exporter s home market an their prie here. b. A tariff on imports that are in exess supply in foreign markets.. The international obligation not to ispose of waste prouts in international waters.. Levie whenever imports ause injury to omesti firms or workers. e. A requirement impose by the International Monetary Fun on ountries requesting assistane, esigne to prevent them from unermining IMF objetives. a 19. The part of the U.S. government that negotiates trae poliy issues with other ountries is a. The International Trae Commission b. The Finane Committee of the U.S. Senate.. The Offie of the Presient.. The Seretary of International Trae e. The Offie of the Unite States Trae Representative e

9 Page 9 of 16 (16) 20. Aoring to the Most Favore Nation priniple, a. Tariffs shoul be zero. b. Tariffs shoul be lowest on imports from ountries that ooperate with our nation s foreign poliy objetives.. A ountry s tariff on imports of a goo shoul be the same for all exporting ountries.. Uner a quota, those imports shoul be amitte that arrive first at the nation s borer. e. One foreign goos are insie a ountry, they shoul be treate the same as omestially proue goos. 21. In the WTO, a Ministerial is a. The lan that a ountry must give to other ountries if it loses a trae ispute. b. The onfusion that erupts when trae negotiators are unable to reah agreement.. A trae agreement between two or more ountries.. A meeting of the trae ministers of all member ountries. e. A legal exeption to an otherwise inviolable rule of the WTO. 22. Compare to 1970, immigration now into the Unite States, as measure by the foreign-born fration of the US population, is a. Muh greater (more than ten times as large) b. Somewhat greater (between twie as large an ten times as large). About the same. Somewhat smaller (between one tenth as large an half as large) e. Muh smaller (less than one tenth as large) b

10 Page 10 of 16 (16) 23. Aoring to eonomi theory, when labor migrates from a low-wage ountry to a high-wage ountry a. Wages in both ountries rise. b. Wages in both ountries fall.. Wages rise in the low-wage ountry an fall in the high-wage ountry.. Wages fall in the low-wage ountry an rise in the high-wage ountry. e. Wages in both ountries remain unhange beause the worl supply of labor has not hange. 24. Whih of the following was reporte in reent news about a eveloping ountry? a. Sri Lanka negotiate a new free trae agreement with Banglaesh. b. Nepal reporte that its exports ha reahe 20% of its GDP.. Inia has aske the International Monetary Fun for a bailout.. Pakistan announe it woul inrease import tariffs, e. A new government in the Malives announe it woul withraw from the WTO. 25. After the US an China impose tariffs on $50 billion of eah other s exports, reent news reporte that a. The US impose tariffs on an aitional $60 billion of China s exports an China respone with tariffs on $60 billion more of US exports. b. The US impose tariffs on an aitional $60 billion of China s exports an China respone with tariffs on $200 billion more of US exports.. The US impose tariffs on an aitional $200 billion of China s exports an China respone with tariffs on $60 billion more of US exports.. The US impose tariffs on an aitional $200 billion of China s exports an China respone with tariffs on $200 billion more of US exports. e. After threatening eah other with aitional tariffs, the US an China agree in a true not to use them an to engage instea in negotiations.

11 Page 11 of 16 (16) Part II: Short Answer Answer on these sheets in the spae provie. 1. (5 points) What o the following aronyms stan for in international eonomis, an/or what o they mean? a. USMCA U.S.-Mexio-Canaa Agreement. The (name given by Trump for the) renegotiate NAFTA. b. DWL Dea-weight loss. The net loss in eonomi welfare ue to a poliy suh as a tariff, measure as the portion of any eonomi loss by one group (usually onsumers) that is not offset by gain to others.. WIPO Worl Intelletual Property Organization. The Unite Nations organization that espouses great protetion for intelletual property: patents, traemarks, an opyrights.. VER Voluntary Export Restraint. An agreement by an exporting ountry to limit its exports at the request of an importing ountry. e. OECD Organization for Eonomi Cooperation an Development. An international organization of mostly high-inome ountries that ollet ata an isuss potential poliy hanges. 2. (3 points) True-False. Cirle the orret answer. a. The Unite States exports less than China but imports more than China b. Over the perio , exports of emerging nations grew more than exports of avane nations. The ountries of Afria trae more with eah other than they o with the evelope worl. True False True True False True True False False

12 Page 12 of 16 (16) 3. (8 points) Eah of the first three tables below shows the amounts of labor require to proue one unit of eah of two goos, X an Y, in two ountries, A an B. These are the only goos, an the only ountries, in the worl. In eah ase, fill in the blanks with X, Y, A, B, both, or neither. Labor neee per unit of output a. Country A has absolute avantage in goo both Country Goo A B Country B has omparative avantage in goo X X Y 6 18 Labor neee per unit of output b. Country with absolute avantage in goo X: B Country Goo A B Country with omparative avantage in goo Y: A X Y Labor neee per unit of output. Country that exports goo X: A Country Goo A B Country that exports goo Y: B X 10 8 Y 12 8 The table below looks muh like the ones above, but this one gives a ifferent kin of information: output per worker (proutivity). Fill in the blanks as above. Output proue per unit of labor. Country that exports goo X: B Country Goo A B Country that exports goo Y: A X Y

13 Page 13 of 16 (16) 4. (8 points) On planet Oberon, there are just two ountries, Apnia an Bubba. Their eonomies have two goos, ooles an ooles, whih they proue using their enowments of labor an apital uner the assumptions of the Heksher-Ohlin fator proportions moel, inluing that the ountries have the same tehnologies. Apnia is enowe with more apital per worker than Bubba. Proution of ooles uses more apital relative to labor than oes proution of ooles. Initially the two ountries o not trae. a. In autarky, whih ountry has the higher wage of labor, Apnia b. An whih has the higher relative prie of ooles? Apnia. When they now open to free international trae, whih ountry will export ooles? Apnia As a result of trae, again using the HO moel, iniate what will happen in the two ountries assuming that the ountry you ve ientifie in part oes inee export ooles. Write in the blanks below one of the following (graing will be base on the answer you gave to part ()): Rise Fall Not hange Can t tell. Proution of ooles in Apnia will Fall e. Proution of ooles in Bubba will Rise f. Employment of labor in prouing ooles in Apnia will Rise g. The wage of labor in Apnia will Fall h. The return to apital in Bubba will Fall 5. (2 points) In the spae below, state two of the three assumptions mae in the New Trae Theory that are ifferent from the Heksher-Ohlin moel. Answer: Any two of: Inreasing returns to sale. Imperfet ompetition. Prout ifferentiation. (or variety)

14 Page 14 of 16 (16) 6. (10 points) In the graph at the right, supply an eman urves are rawn on a gri from whih you an rea orresponing pries an quantities. The urves represent the omesti market for a goo in a small ountry. Use them to answer the questions below in the blanks provie. Feel free to a whatever you nee to the graph, but this will not ount for or against your answers. a. For the initial eman urve, D 1, what is the autarky prie? $14 $ P w =6 4 2 P D 1 D 2 S b. Suppose that the worl prie is $6, as shown. At this worl prie, how muh woul the ountry eman of the goo, how muh woul it supply, an how muh woul it import? Q 55 Deman = 40 Supply = 10 Imports = 30. Suppose now that the ountry imposes a speifi tariff of $4 per unit of the goo. What is now the omesti prie, an how muh oes the ountry eman an supply? Also, how muh oes the government ollet in tariff revenue? Prie = $10 Deman = 35 Supply = 20 Revenue = $60. If the eman urve were now to shift to the position shown as D 2, with the $4 tariff still in plae an the worl prie still $6, what now are your answers to part ()? Prie = $10 Deman = 50 Supply = 20 Revenue = $120

15 Page 15 of 16 (16) P S P 3 P 2 P 1 b h k n g j m p a e f i l o Q 1 Q 2 Q 3 Q 4 Q 5 Q 6 Q D 7. (6 points) The figure above shows omesti supply an eman for a goo in a small ountry, together with several pries an quantities labele on the axes. Initially, with free trae, it faes a worl prie equal to P 2. Using the pries, quantities, an areas labele in the figure, answer the following. a. What is the quantity of imports with free trae at the worl prie P 2? Quantity of imports = Q 5 Q 2 b. Suppose that the ountry now limits imports with a quota an that, as a result, the omesti prie rises to P 3, the worl prie remaining P 2. What is the size of the quota, an how muh are the quota rents? Quota = Q 4 Q 3 Quota rents = Area k. Assuming that the ountry gives away the rights to import uner the quota to foreigners, how muh welfare oes this importing ountry gain or lose as a result of the quota? Domesti welfare hange ue to the quota = Loss of area h+k+n. Suppose now that the worl prie falls from P 2 to P 1 in the figure. How oes this hange the importing ountry s welfare in the two ases of i) free trae, an ii) the quota? (Reor below both the size an the sign of the hange in welfare ue to the fall in worl prie in the presene of free trae an the unhange quota.) i) Free trae Welfare hange = Gain +(+g+j+m+p) ii) With quota Welfare hange = 0 (no hange)

16 Page 16 of 16 (16) 8. (6 points) Define the following terms as they are use in international eonomis: a. Terms of trae The relative prie, on worl markets, of a ountry s exports ompare to its imports. b. Inreasing returns to sale A fall in average ost as an inustry proues larger output by proportional inrease in all inputs. (Or: a rise in output that is larger than proportional to the expansion of all inputs.). Trae ajustment assistane A government program that provies finanial assistane to workers who have lost their jobs ue to imports.. Tariff-rate quota A tariff that is set at two levels, one for imports up to a ertain quantity, an a higher one for imports above that quantity. e. Brain rain The migration out of a ountry of its most euate an skille people. f. Dumping Export of a goo at a prie below the fair prie, the latter efine either as ost, or as the prie on the home market.