1. (20 points) This past Thursday President Obama announced a major overhaul of immigration policy in the United States. As the New York Times noted:

Transcription

1 Professor Robert Staiger Fall 2014/15 Economics 39F: 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 3 hours (but I doubt you will need it). The exam has 60 points. Answer all 3 questions. You should spend the first 10 minutes reading the exam. Good luck! 1. (20 points) This past Thursday President Obama announced a major overhaul of immigration policy in the United States. As the New York Times noted: The centerpiece of the president s announcement is a new program for unauthorized immigrants who are the parents of United States citizens. About four million people will be eligible for a new legal status that would defer their deportations and allow them to work legally.to those people, Mr. Obama said, You can come out of the shadows. The president s announced program -- which would prevent 4 million workers from being deported from the United States -- has stirred a lot of controversy, and it is likely that Republicans will do what they can to block its implementation. President Obama is puzzled by this reaction. He wonders whose interests the Republicans think they are serving by trying to block the program and allowing the deportation to occur. And he wonders whether opposition to his program will evaporate in the long run or persist and strengthen. He has hired you to help him figure all of this out. Please help him by answering the following questions. Throughout you can assume that opposition to the president s program can be predicted on the basis of the impacts of the program on the real incomes of workers and capital owners in the United States (i.e., if someone s real income would be increased by the deportation then this person would oppose the president s program to prevent deportation). a) The president is most concerned about long-run opposition to his program. So he first asks: Will there be long-run opposition in the United States to this program? To answer this question, you may assume (i) that the United States is a small open 2-factor (capital and labor) 2-good (capital-intensive y and labor-intensive x) Heckscher-Ohlin economy that trades freely with the world and exports y, and (ii) that the United States currently produces both x and y and would continue to produce both x and y even if 4 million of its workers were deported. Finally, you may assume that the workers scheduled for deportation would not oppose the president s program in the long run. b) Now that you have answered the president s question about the long-run opposition to his program, he wants to know about the opposition in the short run. He believes that in the short run, illegal workers are largely stuck in the agricultural sector of the U.S. economy as a result of their illegal status (i.e., illegal workers cannot move freely between sectors of the economy due to the risk of being caught). And he asks: Will there be short-run opposition in the United States to this program? To answer this question, you may assume (i) that the United States is a small open 2-good (Food and Clothing) 3- factor (Capital specific to Clothing, Illegal workers specific to Food, and Legal workers mobile between Food and Clothing) Specific Factors economy that trades freely with the world and exports Food, and (ii) that the United States currently produces both Food and Clothing and would continue to produce both Food and Clothing even if 4 million of its Illegal workers were deported. Finally, you may assume that Illegal workers would not oppose the president s program in the short run.

2 2. (20 points) This past Friday, the New York Times ran an article with the headline Falling Wages at Factories Squeeze the Middle Class. The article begins with: For nearly 20 years, Darrell Eberhardt worked in an Ohio factory putting together wheelchairs, earning $18.50 an hour, enough to gain a toehold in the middle class and feel respected at work. He is still working with his hands, assembling seats for Chevrolet Cruze cars at the Camaco auto parts factory in Lorain, Ohio, but now he makes $10.50 an hour and is barely hanging on. I d like to earn more, said Mr. Eberhardt, who is 49 and went back to school a few years ago to earn an associate s degree. But the chances of finding something like I used to have are slim to none. It may seem puzzling that this drop in U.S. manufacturing wages, which likely reflects increased trade pressures faced by U.S. firms, is occurring now, when U.S. tariffs have been low for some time. Use the 2- good 2-country Ricardian trade model and the 2-good 2-factor 2-country Heckscher-Ohlin model to argue that the increasing flow of technology across countries can help resolve this puzzle. Specifically, please do the following: a) First, use the Ricardian model and show that, in a world of free trade and with the U.S. producing both goods, the U.S. wage would remain higher than the foreign wage as long as the U.S. technology exhibits an absolute advantage in the good that is also produced by the other (foreign) country. b) Second, use the Heckscher-Ohlin model and show that, in a world of free trade where the U.S. is the capital abundant country and with both countries producing both goods, the U.S. wage will become equal to the foreign wage if the U.S. absolute advantage is eroded and technologies are the same across countries as the Heckscher-Ohlin model assumes. c) Finally, using the Heckscher-Ohlin model and again assuming the U.S. is the capital abundant country, show that a U.S. tariff would raise Mr. Eberhardt s real wage. 3. (20 points) While the climate deal announced two weeks ago by the United States and China still has many details that remain to be worked out, it has turned the world s attention to India, the 3 rd largest carbon emitter after the United States and China. As an Editorial in last Friday s New York Times puts it: The breakthrough announcement last week by the United States and China of a deal setting limits on greenhouse gases has offered new hope for a global agreement on climate change. The U.S.-China deal follows the European Union s ambitious pledge to reduce emissions by 40 percent of 1990 levels by Now the world needs India, already the world s third-largest emitter of greenhouse gases, to add to the momentum. Without India on board, the best efforts of the rest of the world will not be enough. Which means that India must rethink its relationship with coal and redouble its investment in developing renewable energies. India s long-held position is that it will not sacrifice eradicating poverty to limit carbon

3 emissions. Nearly 300 million Indians have no access to electricity, and millions more live with regular power cuts and brownouts. India s current share of global greenhouse gas emissions is 7 percent, compared with a combined share of about 45 percent for the United States and China. But India s economy is growing fast, and the energy infrastructure India builds now will determine its capacity to rein in emissions over the next critical decades for climate change. To capture the some of the essence of the U.S.-India greenhouse gas situation described by the New York Times, consider the following version of the Continuum-of-Goods Ricardian trade model, with the United States as the domestic country and India as the foreign country. Suppose that the U.S. unit labor requirement for any good z є [0,1] is given by l(z) = l + θz, while the Indian unit labor requirement for any good z є [0,1] is given by l*(z) = l + θ*z. Let us interpret θz as the amount of labor required to comply with the U.S. carbon standard when producing one unit of good z in the United States. Likewise, θ*z is the amount of labor required to comply with the Indian carbon standard when producing one unit of good z in Indian. So for a given carbon standard, we can think of low-z goods as naturally green goods, because it doesn t take much labor to clean up the production process and meet the standard, while high-z goods are naturally dirty goods. Using this model, please answer the following questions: a) Show that, if the U.S. has a carbon standard while India has none (i.e., if θ> θ*=0), then in the free trade equilibrium between these countries the United States will specialize in a range of naturally green goods and India will specialize in a range of naturally dirty goods. b) Next show that, if the United States tightens its carbon standard (i.e., if θ is increased), then a range of the dirtiest goods among those originally produced in the United States will stop being produced there and will instead be produced in India. c) Extra Credit: Describe how, while your answer to (b) above has the flavor of carbon leakage, the overall carbon emissions of India will actually fall as a result of the tightening of the U.S. carbon standard.

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18