Economics 340 International Economics First Midterm Exam. Form (KEY) 0. February 20, 2017

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1 Page 1 of 14 (16) NAME: Student ID No.: Economics 340 International Economics First Midterm Exam Form (KEY) 0 February 20, 2017 INSTRUCTIONS: READ CAREFULLY!!! 1. Please do not open the exam until you are told to do so. 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. Find the FORM NUMBER above and enter it where it asks for KEY on the scantron sheet. Be sure to fill in the bubbles. 4. This exam has 100 points and you have approximately 80 minutes to complete the test. Check that you have all 15 pages of the exam, including this cover sheet. 5. Part 1 consists of 25 multiple choice questions worth 2 points each. Answers to these should be marked on the scantron sheet using a #2 pencil. There are no penalties for guessing. 6. Part 2 consists of short-answer questions for which you must provide written answers on these sheets. Point values for questions in Part 2 are indicated in parentheses. Part 2 has 48 points total. 7. That leaves 2 points unaccounted for. You will get these if (and only if) you put your name and ID number on both this exam booklet and the scantron sheet, and if you enter the form number (see above) on the scantron. 8. Good luck!

2 Page 2 of 15 (16) FORM 0 Economics 340 First Midterm Exam Part 1: Multiple Choice (2 points each) Select the best answer of those given. Answers to this part should be marked on the scantron sheet using a #2 pencil. There is only one correct answer per question, and there is no penalty for guessing. 1. What is the index of openness used in the textbook to compare openness of countries? a. The balance of trade b. The terms of trade c. Exports divided by population d. Exports plus imports divided by GDP e. Foreign capital inflows per unit of wealth d 2. Which of the following were the beggar thy neighbor policies used during the Great Depression I. Export subsidies II. High tariffs on imports III. Competitive devaluations of currencies IV. Prohibitions on capital inflows a. I and II b. I and III c. I and IV d. II and III e. II and IV d

3 Page 3 of 15 (16) 3. The graphs below show supply and demand for a good in two countries, A and B. If these countries were to open to free trade with each other (no other country being involved), what would be the equilibrium price? P Country A P Country B $15 $15 $10 S A $10 $5 $5 D B S B D A Q a. $6 b. $9 c. $12 d. $18 e. It is impossible to know without further information b 4. In a two-country, two-good Ricardian model with free trade, Estonia exports carrots to Latvia and Latvia exports tomatoes to Estonia. From this we can conclude that a. An hour of Estonian labor can produce more carrots than an hour of Latvian labor. b. Production of tomatoes in Latvia requires less labor than would be required to produce tomatoes in Estonia. c. Estonian labor is more productive than Latvian labor in producing carrots, but less productive than Latvian labor in producing tomatoes. d. All of the above e. None of the above e

4 Page 4 of 15 (16) 5. According to the theory of comparative advantage, countries gain from trade because a. World output can rise when each country specializes in what its does relatively best. b. Trade makes firms behave more competitively, reducing their market power. c. All firms can take advantage of cheap labor. d. Output per worker in each firm increases. e. Every country has an absolute advantage in producing something. a 6. Paul Krugman, although known for having discovered new theoretical rationales for the use of policies that restrict international trade, nonetheless concludes in his assigned article that these policies are not likely to be usable because a. Empirical difficulties make it hard to know in which sectors to intervene. b. Governments will choose policies based on lobbying rather than on the national interest. c. Use of these policies is likely to cause other countries to retaliate with policies of their own, undermining the benefits. d. All of the above. e. None of the above. d

5 Page 5 of 15 (16) 7. In his scarce factor paradox, Leontief found the following (using the notation K=capital, L= labor, X=exports, M=imports, US=United States, UK=United Kingdom) a. b. c. d. e. $ # $ # $ # $ # $ # K X L X K X L X K X L X K X L X K X L X % ' & % ' & % ' & % ' & % ' & US exports US exports US exports US exports US exports < K % X $ ' # & L X < K % M $ ' # & L M > K % X $ ' # & L X > K % M $ ' # & L M < K % M $ ' # & L M UK exports US imports UK exports US imports UK imports b 8. According to the factor proportions model, countries have comparative advantage in the good that a. Employs a relatively large amount of their abundant factor. b. Employs a relatively large amount of the factor whose price there is relatively high. c. Uses intensively their scarce factor. d. Requires proportionately more of every factor than the goods they import. e. Increases their proportional endowment of their scarce factor. a

6 Page 6 of 15 (16) 9. Suppose you know that, in a small country, a 3% tariff on imported beer would cause a deadweight loss of $12,000. Which of the following would be most plausible as the deadweight loss due to a 6% tariff on beer, in the same country? a. $6,000 b. $12,000 c. $24,000 d. $36,000 e. $48,000 e 10. When a large country levies a tariff on imports a. The world price falls. b. Demanders of the good on the domestic market are hurt. c. Foreign sellers of the good are hurt. d. The domestic price rises by less than the tariff. e. All of the above. e 11. If the US subsidizes production of corn, who is hurt? a. US corn farmers. b. Consumers of corn in the US. c. Consumers of corn in foreign countries that import corn. d. Consumers of corn in foreign countries that export corn. e. None of the above. e 12. When is a product standard a nontariff barrier? a. When procedures for certifying compliance are biased against imports. b. When its purpose is only to protect the health of domestic consumers. c. When it requires a technology that only foreigners have. d. When it conforms to best practices of domestic producers. e. When it is enforced by an international organization. a

7 Page 7 of 15 (16) 13. Which of the following will cause the tariff equivalent of a quota to become larger in a small country? a. A decrease in domestic demand (the demand curving shifting left). b. A decrease in domestic supply (the supply curving shifting left). c. A rise in the world price. d. A rise in the quantity of imports permitted by the quota. e. Nothing: the tariff equivalent of a quota is fixed by law. b 14. Why is the use of a tariff to raise revenue second best? a. Because smugglers evade the tariff. b. Because too large a tariff will stop all imports, thus yielding no revenue. c. Because more revenue can be gotten at lower cost with a consumption tax. d. Because a government that used a tariff would be voted out of office. e. Because a tariff is the optimal method of raising revenue. c 15. By restricting imports with a tariff, a large country will a. Improve its terms of trade. b. Increase the welfare of all other countries. c. Raise the price of the imported good on world markets. d. Cause domestic producers of the imported good to reduce their output and raise their price. e. Hurt itself, compared to what it could have accomplished by subsidizing imports. a 16. Compared to the average of tariffs levied by the United States, the Trade Restrictiveness Index of the US is a. Smaller, because many US tariffs eliminate trade entirely. b. Larger, because the TRI includes tariffs levied by other countries against US exports. c. Smaller, because it is measured on a scale of zero to one. d. Larger, because US tariffs are not all the same. e. The same thing; the TRI is just another name for the average tariff. d

8 Page 8 of 15 (16) 17. Regarding the GSP, Glassman argues that it is illogical because a. It grants tariff preferences to rich countries. b. It violates MFN. c. The US cannot afford to lose tariff revenue from the government budget. d. It hurts the countries that it is supposed to help. e. It benefits countries that oppose the US in trade negotiations. e 18. In the United States, an anti-dumping duty is a tariff levied against imports a. Whose price is lower in the foreign market. b. That have been determined by the USITC to be unfairly priced. c. Being sold in the US for a price below cost. d. Of goods that foreign consumers do not want. e. That are subsidized by a foreign government. c 19. Although there are some exceptions permitted to this, the Most Favored Nation principle of the GATT and WTO says that a. Each country must select a preferred provider of the goods that it imports and then levy no tariff on those imports. b. Each member should levy as low a tariff on any member s exports as the lowest tariff that it levies on any other member s exports of the same good. c. Countries cannot raise their tariffs above the bound levels to which they have committed in trade negotiations. d. Once a product has entered a country, it should be treated the same as products that originated inside that country. e. Countries that subsidize exports will be forced to relinquish their memberships. b 20. Which of the following is not one of the steps in the WTO Dispute Settlement mechanism? a. Consultation between the disputing parties. b. Recommendation by a 3-person panel. c. Ruling by the Appellate Body. d. Levying of tariffs against the exports of the offending party. e. A fine imposed by the WTO on the offending party. e

9 Page 9 of 15 (16) 21. If the United States were to grant market economy status to China, a. China would be free to subsidize its exports to the US. b. China would have to stop subsidizing its exports to the US. c. China would be able to use prices in China to determine whether US exports are dumped. d. The US would use prices in China to determine whether Chinese exports are dumped. e. US tariffs would not apply to exports to the US from China. d 22. How does the presence of strong labor unions in a country affect the amount of immigration into it? a. Strong unions increase immigration because unions seek larger membership. b. Strong unions decrease immigration because migrants prefer to avoid paying union dues. c. Strong unions have ambiguous effect on immigration because they attract more workers from abroad but also resist letting them in. d. Strong unions are irrelevant to immigration because immigrants are not eligible to join them. e. Strong unions increase immigration because immigrants advocate for worker rights. c 23. A guest worker program is a. A factory that pays workers with room and board, rather than with money wages. b. A type of employment offered by multinational corporations who hire workers for only a limited time period. c. A means of producing labor-intensive goods for export in an industry that normally would not employ labor. d. A firm in a developing country that uses information technology so that its workers can replace workers in developed countries. e. A government program that permits workers to enter a country from abroad to work temporarily where there is a labor shortage. e

10 Page 10 of 15 (16) 24. In the news we saw that a complaint was filed recently regarding trade of aluminum. Who filed it, against whom? a. By the Obama administration against China. b. By the Trump administration against Mexico. c. By Japan against South Korea. d. By China against the United States. e. By the United Kingdom against Germany. a 25. Which of the following was not reported in the news during this course? a. China s reserves of foreign exchange fell to a 5-year low. b. The US dollar fell relative to a basket of currencies since the election of Donald Trump. c. The value of Turkey s currency, the lira, continued to fall. d. The price of gold reached its highest level in over two months. e. Mexico s peso fell to record lows. b

11 Page 11 of 15 (16) Part II: Short Answer Answer on these sheets in the space provided. 1. (5 points) What do the following acronyms stand for in international economics, and/or what do they mean? a. GATT General Agreement on Tariffs and Trade: The agreement reached aftere World War II to constrain countries from using harmful trade policies. b. USTR United States Trade Representative: The part of the US government that negotiates trade policies with other countries. c. METI Ministry of Economy, Trade, and Industry: Japan s ministry responsible for international trade. d. WEF World Economic Forum: The organization that brings together prominent members of government, business, and academia at a meeting in Davos, Switzerland, every year in January. e. IIT Intra-Industry Trade: International trade in both directions exports and imports within the same industry. 2. (4 points) True-False. Circle the correct answer. a. Over the 20 years prior to the 2008 global recession, world trade grew more rapidly than world GDP. b. The U.S. exports a larger fraction of its GDP than do Japan and Germany c. Rich countries trade more with each other than poor countries trade with each other. True False True True False False True False True

12 Page 12 of 15 (16) d. Foreigners own more assets in the U.S. than the U.S. owns abroad True False True

13 Page 13 of 15 (16) 3. (8 points) Each of the first three tables below shows the amounts of labor required to produce one unit of each of two goods, X and Y, in two countries, A and B. These are the only goods, and the only countries, in the world. There are no tariffs, transport costs, or any other barriers to trade. In each case, fill in the blanks with X, Y, A, B, both, or neither. Labor needed per unit of output a. Country A has absolute advantage in good X Country Good A B Country B has comparative advantage in good Y X 6 12 Y Labor needed per unit of output b. Country with absolute advantage in good X: A Country Good A B Country with comparative advantage in good Y: B X Y Labor needed per unit of output c. Country that exports good X: B Country Good A B Country that exports good Y: A X Y The table below looks much like the ones above, but this one gives a different kind of information: output per worker (i.e., productivity). Fill in the blanks as above. Output produced per unit of labor d. Country that exports good X: A Country Good A B Country that exports good Y: B X 150, ,000 Y

14 Page 14 of 15 (16) 4. (6 points) Suppose the world consists of two countries, Highedistan, in which most of the population is high skilled, and Lowedesia, where most people are unskilled. Both countries use these two factors of production to produce two goods: computers, whose production uses high-skilled labor intensively, and chalk, which uses lowskilled labor intensively. According to the Heckscher-Ohlin model, if these two countries open to free international trade, what will happen? Circle one of the following in each case: a. Production of chalk in Highedistan will: expand contract stay the same contract b. Lowedesia will import: computers chalk neither both computers c. Some high-skilled labor in Highedistan will move into the Computer sector Chalk sector Neither sector (labor won t move) computer sector d. The wages paid to unskilled labor in the two countries will Become more alike Become less alike Not change become more alike e. The real wage of skilled labor in Lowedesia will rise fall stay the same fall f. The real wage of unskilled labor employed in the computer industry in Lowedesia will rise fall stay the same rise 5. (12 points) The two graphs on the next page (which are identical) each show supply and demand curves for a good in the domestic market of a country, together with a labeled grid from which you can read prices and quantities. With free trade, the initial world price of the good is $5. The country then levies a specific tariff of $4. Follow the instructions below the graphs by adding the requested information to the graphs and by filling in the blanks with the requested numbers or symbols.

15 Page 15 of 15 (16) P $20 Country A S P $20 Country A S D Q D 20 Q a. With free trade, what quantity of the good does the country import? 12 b. (2 points) Suppose first that the country is small. Under that assumption, draw lines in the figure on the left to show the domestic price in the presence of the $4 tariff and the quantities supplied and demanded. c. What is the quantity of imports of the small country, with the tariff? 6 d. What is the tariff revenue? $24 e. What is the small country s dead weight loss due to the tariff? ( )$12 f. (2 points) Now suppose that the country is not, after all, small, but instead that its use of the $4 tariff causes the world price to fall to $3. Add lines to the figure on the right showing this world price, the large country s domestic price, and the quantities supplied and demanded in this case. g. What is the tariff revenue of the large country? $36 h. (2 points) What is the net gain (+) or loss ( ) of the large country due to the tariff (compared to free trade)? (Be sure to give the sign, as well as the dollar value.) +$15 i. Compare the two figures to find whether suppliers in this market gain more from the tariff if the country is small or if it is large? (Write small or large in the blank.) small

16 Page 16 of 15 (16) 6. (7 points) The figure at the right shows domestic supply and demand for a good in a small country, together with several prices and quantities labeled on the axes. Initially, with free trade, the country faces a world price equal to P 1. Using the prices, quantities, and areas labeled in the figure, answer the following. a. Consider first a tariff on imports, set at a level that will raise the domestic price to P 2. P P 2 P 1 S b d e g c f h a D Q 1 Q 2 Q 3 Q 4 Q How much will suppliers gain from this tariff? How much will demanders lose from this tariff? How much is the dead weight loss due to this tariff? Area b Area (b+d+e+g) Area (d+g) b. Now suppose that, instead of the tariff, the country provides a subsidy to production equal to (P 2 P 1 ) per unit supplied. How much will suppliers gain from this subsidy? How much will demanders lose from this subsidy? How much does the country as a whole (including its government) lose from this subsidy? Area b Nothing Area d c. Finally, suppose that, instead of a tariff or a subsidy, the country taxes demanders by an amount equal to (P 2 P 1 ) per unit demanded. How much does the country as a whole (including its government) lose from this tax? Area g

17 Page 17 of 15 (16) 7. (6 points) Define the following terms as they are used in international economics: a. Tariff-rate quota A policy that levies a low (or zero) tariff on imports up to a certain quantity, and a higher tariff on imports above that. b. Wage insurance A government program that temporarily pays laid-off workers a fraction of the gap between their old wage and their new wage. c. Shallow integration Elimination or reduction of tariffs, quotas, and other border-related barriers to trade. d. Mercantilism The system of nationalistic economics (from the 1700s) stressing exports over imports as a way to build revenues. e. Strategic trade policy The use of government policy to tilt the terms of oligopolistic competition so as to shift excess returns from foreign to domestic firms; i.e., to capture profit from foreign firms. f. Autarky A situation in which a country does not trade with other countries.