blue A FINAL EXAM Economics 452 International Trade Theory and Policy Fall 2014 FOREIGN DIRECT INVESTMENT 1. Although the richest OECD countries historically have been the biggest recipients of inward FDI, FDI flows into countries outside the OECD have been around of world FDI inflows since 2009. a) 10% b) 20% c) 50% d) 70% e) 90% 2. Investing in affiliates that undertake part of the production chain in their location (while other stages of production take place elsewhere) is best described as: a) horizontal FDI b) vertical FDI c) diagonal FDI d) circular FDI e) export platform FDI 3. Investing in affiliates that replicate the production process (that the parent firm undertakes in its domestic facilities) elsewhere in the world is best described as: a) horizontal FDI b) vertical FDI c) diagonal FDI d) circular FDI e) export platform FDI 4. Foreign outsourcing is a) the transfer of operations to foreign contractors b) an example of internalization c) an example of foreign direct investment d) considered illegal in the United States e) the substitution of immigration for foreign direct investment 1
TRADE POLICIES 5-12 Suppose the United States loosens a binding quota on imports of textiles from China, to permit more imports of textiles from China. 5. The quantity demanded of textiles and consumer surplus in the United States a) rises due to the US price of textiles rising b) rises due to the US price of textiles falling c) remains the same d) falls due to the US price of textiles rising e) falls due to the US price of textiles falling 6. The quantity supplied of textiles and producer surplus in the United States a) rises due to the US price of textiles rising b) rises due to the US price of textiles falling c) remains the same d) falls due to the US price of textiles rising e) falls due to the US price of textiles falling 7. Relaxing the US quota on textiles improves US welfare through reducing the a) US consumption distortion b) US production distortion c) quota rents transferred to foreign textiles producers d) a, b and c e) a and b 8. Relaxing the US quota on textiles improves world welfare through reducing the a) US consumption and production distortions b) foreign consumption and production distortions c) quota rents transferred to foreign textiles producers d) a, b and c e) a and b 2
9-12 Suppose Korea imposes an export subsidy on cars. Korea is large enough for its policies to affect the world price for cars. 9. Imposing the export subsidy causes the price of cars in Korea to a) rise by the full amount of the subsidy b) rise by less than the full amount of the subsidy c) fall by the full amount of the subsidy d) fall by less than the full amount of the subsidy e) remain unchanged 10. Imposing the export subsidy causes the price of cars in the rest of the world to a) rise by the full amount of the subsidy b) rise by less than the full amount of the subsidy c) fall by the full amount of the subsidy d) fall by less than the full amount of the subsidy e) remain unchanged 11. Imposing the Korean export subsidy harms Korean welfare due to Koreans consuming, producing and terms of trade losses for Korea. a) too much, too much b) too much, too little c) too little, too much d) too little, too little 12. Imposing the Korean export subsidy harms world welfare due to Koreans consuming and producing and the rest of the world consuming and producing. a) too much, too much; too little, too little b) too much, too little; too little, too much c) too little, too much; too much, too little d) too little, too little; too much, too much 3
POLITICAL ECONOMY OF TRADE POLICY 13. If some domestic market, such as the labor market, fails to function properly, deviating from free trade a) is always a good idea b) can sometimes help correct the existing distortion if a more targeted policy is not feasible c) should be used in addition to more targeted policies as manipulating two different policies ensures a better outcome d) is never a good idea as free trade is ALWAYS best 14. Large countries who adopt tariffs in order to improve their terms of trade (by buying imports cheaper) a) run the risk of provoking retaliation by their trading partners b) are engaging in beggar-thy-neighbor policies that generate benefits at the expense of other countries c) will likely need to engage in bilateral (or multilateral) negotiations to reduce their tariffs in exchange for other countries doing the same d) would typically find themselves worse off than under free trade once foreign retaliation has occurred e) all of the above 15. As a percentage of GDP, who stands to gain the most from a move to free trade? a) United States b) European Union c) Japan d) developing countries e) world as a whole 16. Free trade areas and customs unions a) always raise the welfare of participating countries b) can raise the welfare of participating countries if trade creation outweighs trade diversion c) can raise the welfare of participating countries if trade diversion outweighs trade creation d) always reduce the welfare of participating countries 4
TRADE POLICY PROBLEMS In the United States (US), inverse demand is, while inverse supply is. In the rest of the world (ROW), inverse demand is, while inverse supply is.. 17. A The US autarky price is P a) 24 b) 20 c) 16 d) 12 18. US quantity demanded is Q D a) 14 - (½) P b) -14 + (½) P c) 14 + (½) P d) -14 - (½) P 19. US quantity supplied is Q S a) 6 - (½) P b) -6 + (½) P c) 6 + (½) P d) -6 - (½) P 20. US import demand is M a) 20 - P b) -20 + P c) 24 + P d) -24 - P 21. US import demand has price intercept and slope. a) 20, -1 b) 24, 1 c) 20, -1/2 d) 24, -1/2 5
22. A* The ROW autarky price is P a) 24 b) 20 c) 16 d) 12 23. ROW quantity demanded is a) -10 + (½) P* b) 10 - (½) P* c) 10 + P* d) 10 - P* 24. ROW quantity supplied is is. a) 2 - P* b) -2 + (½) P* c) 2 + P* d) -2 - (½) P* 25. ROW export supply is X* a) 14 - P* b) -14 + P* c) 12 + P* d) -12 - P* 26. ROW export supply has price intercept and slope. a) 12, -1 b) 12, 1 c) 14, -1 d) 14, 1 6
27. The free trade price is P a) 24 b) 20 c) 16 d) 12 28. US imports under free trade are M a) 6 b) 4 c) 3 d) 2 29. US quantity demanded under free trade is D 1 a) 8 b) 7 c) 6 d) 5 30. US quantity supplied under free trade is S 1 a) 5 b) 4 c) 3 d) 2 31. The US tariff-ridden import demand for a specific tariff t 4 is M T a) 16 - P* b) -16 + P* c) 24 - P* d) -24 + P* 7
32. It has price intercept and slope. a) 24, -1 b) 24, 1 c) 16, -1 d) 16, 1 33. The ROW price with the tariff is a) 18 b) 16 c) 14 d) 12 34. The US price with the tariff is a) 18 b) 16 c) 14 d) 12 35. US imports with the tariff are a) 4 b) 3 c) 2 d) 1 36. US quantity demanded with the tariff is D 2 a) 8 b) 7 c) 6 d) 5 8
37. US quantity supplied with the tariff is S 2 a) 5 b) 4 c) 3 d) 2 38. How large of a tariff would the United States need to impose to prohibit all imports? a) 16 b) 8 c) 4 d) 2 39. The change in US consumer surplus due to the tariff is a) 11 b) 5 c) -5 d) -11 40. The change in US producer surplus due to the tariff is a) 11 b) 5 c) -5 d) -11 41. The government revenue collected in the United States due to the tariff is a) 12 b) 8 c) 4 d) 2 9
42. The US consumption distortion created by the tariff is a) 4 b) 2 c) 1 d) 1/2 43. The US production distortion created by the tariff is a) 4 b) 2 c) 1 d) 1/2 44. The US efficiency loss is a) 8 b) 4 c) 2 d) 1 45. The US efficiency loss occurs because the United States produces and consumes due to the tariff. a) too much, too much b) too much, too little c) too little, too much d) too little, too little 46. The US terms of trade gain is a) 16 b) 8 c) 4 d) 2 10
47. The US terms of trade gain occurs because the United States due to the tariff. a) buys imports cheaper b) buys more imports c) buys fewer imports d) has no effect on the ROW price 48. The change in welfare in the United States due to the tariff is a) 6 b) 2 c) 0 d) -2 49. Compared to free trade, is the United States better or worse off with this tariff? a) better with this tariff b) worse with this tariff c) the same with this tariff as with free trade d) none of the above e) cannot tell from the information provided 50. Why? Because the outweighs the for a large country (able to affect world prices) adopting a small tariff starting from free trade. a) terms of trade gain, efficiency loss b) efficiency loss, terms of trade gain c) production distortion, consumption distortion d) consumption distortion, production distortion 11
blue A FINAL EXAM SOLUTIONS Economics 452 International Trade Theory and Policy Fall 2014 1c 2b 3a 4a 5b 6e 7d 8e 9b 10d 11c 12c Although the richest OECD countries historically have been the biggest recipients of inward FDI, FDI flows into countries outside the OECD have been around 50% of world FDI inflows since 2009. Investing in affiliates that undertake part of the production chain in their location (while other stages of production take place elsewhere) is best described as vertical FDI. Investing in affiliates that replicate the production process (that the parent firm undertakes in its domestic facilities) elsewhere in the world is best described as horizontal FDI. Foreign outsourcing is the transfer of operations to foreign contractors. The quantity demanded of textiles and consumer surplus in the United States rises due to the US price of textiles falling. The quantity supplied of textiles and producer surplus in the United States falls due to the US price of textiles falling. Relaxing the US quota on textiles improves US welfare through reducing the US consumption distortion, US production distortion, and quota rents transferred to foreign textiles producers. Relaxing the US quota on textiles improves world welfare through reducing the US consumption and production distortions, and foreign consumption and production distortions. Imposing the export subsidy causes the price of cars in Korea to rise by less than the full amount of the subsidy. Imposing the export subsidy causes the price of cars in the rest of the world to fall by less than the full amount of the subsidy. Imposing the Korean export subsidy harms Korean welfare due to Koreans consuming too little, producing too much and terms of trade losses for Korea. Imposing the Korean export subsidy harms world welfare due to Koreans consuming too little and producing too much and the rest of the world consuming too much and producing too little. 1
13b 14e 15d 16b If some domestic market, such as the labor market, fails to function properly, deviating from free trade can sometimes help correct the existing distortion if a more targeted policy is not feasible. Large countries who adopt tariffs in order to improve their terms of trade (by buying imports cheaper): all of the above. a) run the risk of provoking retaliation by their trading partners b) are engaging in beggar-thy-neighbor policies that generate benefits at the expense of other countries c) will likely need to engage in bilateral (or multilateral) negotiations to reduce their tariffs in exchange for other countries doing the same d) would typically find themselves worse off than under free trade once foreign retaliation has occurred As a percentage of GDP, developing countries stand to gain the most from a move to free trade. Free trade areas and customs unions can raise the welfare of participating countries if trade creation outweighs trade diversion. TRADE POLICY PROBLEMS In the United States (US), inverse demand is, while inverse supply is. In the rest of the world (ROW), inverse demand is, while inverse supply is.. A 17b The US autarky price is P 20 18a US quantity demanded is Q D 14 - (½) P 19b US quantity supplied is Q S 6 - (½) P 20a US import demand is M 20 - P 21a US import demand has price intercept 20 and slope -1. 22d A* The ROW autarky price is P 12 23b ROW quantity demanded is 10 - (½) P* 24b ROW quantity supplied is is -2 + (½) P* 25e ROW export supply is X* -12 + P (none of the above) 26b ROW export supply has price intercept 12 and slope 1. 27c The free trade price is P 16 28b US imports under free trade are M 4 29c US quantity demanded under free trade is D 1 6 30d US quantity supplied under free trade is S 2 1 2
31a The US tariff-ridden import demand for a specific tariff t 4 is M T 16 - P* 32c It has price intercept 16 and slope -1. 33c The ROW price with the tariff is 14 34a The US price with the tariff is 18 35c US imports with the tariff are 2 36d US quantity demanded with the tariff is D 2 5 37c US quantity supplied with the tariff is S 2 3 38b How large of a tariff would the United States need to impose to prohibit all imports? 8 39d The change in US consumer surplus due to the tariff is -11 40b The change in US producer surplus due to the tariff is 5 41b The government revenue collected in the United States due to the tariff is 8 42c The US consumption distortion created by the tariff is 1 43c The US production distortion created by the tariff is 1 44c The US efficiency loss is 2 45b The US efficiency loss occurs because the United States produces too much and consumes too little due to the tariff. 46c The US terms of trade gain is 4 47a The US terms of trade gain occurs because the United States buys imports cheaper due to the tariff. 48b The change in welfare in the United States due to the tariff is 2 49a 50a Compared to free trade, the United States better off with this tariff. Why? Because the terms of trade gain outweighs the efficiency loss for a large country (able to affect world prices) adopting a small tariff starting from free trade. 3