Midterm Exam Econ 355 Time allowed: 70 minutes (1 hour and 10 minutes) 1. Read all questions carefully and encircle the right answer or write when ever needed. Each question is worth one point unless otherwise indicated. 2. Answers to Essay question should be written in the booklets provided to you, and multiple questions should be answered in this booklet, which needs to be returned at the end of the exam. 3. At the end of the exam you need to return this question booklet back. 4. You should not have your cell phones on you / with you. In case they are found to be switched on, your exams would be taken from you. 5. When you finish the exam hand in your exam and leave the exam hall. If you are found talking in the exam hall your exam will be cancelled. If only 10 minutes are left please keep sitting till all the exams are collected 6. Please keep your ids outside. (1 point) a) Name, b) Student ID MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the border would A) move the point of production along the production possibility curve. B) shift the production possibility curve outward, and increase the production of both goods. C) shift the production possibility curve outward (biased shift) and decrease the production of the labor-intensive product. D) shift the production possibility curve outward (biased shift) and decrease the production of the capital-intensive product. 2) Who earns the import quota rents if instead of import tariff domestic country imposes Import quotas that are auctioned to the domestic firms by the domestic government? A) Domestic firms B) Domestic government C) Foreign firms D) Foreign government 3) In the model described in chapter 3, the specific factor model, if the price of manufactures rises, then A) the real income of capital rises. B) the real income of land rises. C) the purchasing power of landowners rises. D) the production of both products falls. 4) According to the Heckscher-Ohlin model, if the United States is richly endowed in human-capital (Skilled Workers) relative to Mexico, then as NAFTA increasingly leads to more bilateral free trade between the two countries, A) the United States will find its industrial base sucked into Mexico. B) Mexico will find its relatively highly skilled workers drawn to the United States. C) the wages of highly skilled U.S. workers will be drawn down to Mexican levels. D) the wages of highly skilled Mexican workers will rise to those in the United States. E) the wages of highly skilled Mexican workers will fall to those in the United States. 5) The simple model of competition among political parties long used by political scientists tends to lead to the practical solution of selecting the A) optimal tariff. B) prohibitive tariff. C) zero (free-trade) tariff. D) the tariff rate favored by the median voter. 6) The WTO was established by the of multilateral trade negotiations. A) Kennedy Round B) Tokyo Round C) Uruguay Round D) Dillon Round 2
7) A policy of tariff reduction from t=100% to t=70% (given that the optimal tariff is t=20%) in the computer industry is A) in the interest of the United States as a whole and in the interest of computer producing regions B) in the interest of the United States as a whole but not in the interest of computer producing regions C) not in the interest of the United States as a whole but in the interests of computer producing regions D) not in the interest of the United States as a whole and not in the interests of computer consumers. 8) ( 2points) If Australia has relatively more land per worker, and Belgium has relatively more capital per worker, then if trade were to open up between these two countries, A) the relative price of the capital-intensive product would rise in Australia. B) the world price of the land-intensive product would be higher than it had been in Belgium. C) the world price of the land intensive product would be higher than it had been in Australia. D) the relative price of the land intensive product would rise in Belgium. 9) If a good is imported into (small) country H from country F, then the imposition of a tariff in country H A) raises the price of the good in both countries ("the "Law of One Price"). B) raises the price in country H and cannot affect its price in country F. C) lowers the price of the good in both countries. D) lowers the price of the good in H and could raise it in F. E) raises the price of the good in H and lowers it in F. Assume that only two countries, A and B, exist. Consider the following data: Countries Factor Endowments A B Labor Force 45 20 Capital Stock 15 10 10) If good S is labor intensive, then following the Heckscher-Ohlin Theory, A) country A will export good S. B) country B will export good S. C) both countries will export good S. D) trade will not occur between these two countries. E) Insufficient information is given. 11) In case of a specific factor model. If the price of manufactures and the price of food increase by 25%, then A) the economy moves down its aggregate supply curve. B) the economy moves back along its aggregate demand curve. C) the relative quantities of manufactures and food remain unchanged. D) the relative quantities of products increases by 25%. E) the relative quantities of products decreases by 25%. 3
12) The main redistribution effect of a tariff is the transfer of income from A) domestic producers to domestic buyers. B) domestic buyers to domestic producers. C) domestic producers to domestic government. D) domestic government to domestic consumers. 13) If the world terms of trade equal those of country F, then A) country H but not country F will gain from trade. B) country H and country F will both gain from trade. C) neither country H nor F will gain from trade. D) only the country whose government subsidizes its exports will gain. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 14) ( 3points) Given the following information: Home Foreign Units Produced by One Worker/Hour Cloth Widgets 10 20 60 30 What is the opportunity cost of cloth in terms of Widgets in Foreign? Home country has comparative advantage in? 15) a) (2 points) Explain Rybczynski's theorem. b) (4 points) Prove Rybczynski's theorem using a diagram. c) (2 point) What is Hecksher-Ohlin Theorem. 4
16) Do one of the following parts. Either Part A or Part B. Part A ( 5 points )Presumably, since Canada is a large country in many of its international markets, a positive optimum tariff exists for this country. It follows therefore that when any legislator or government official who promotes zero-tariff free trade policies, is by definition not acting in the public's best interest. Discuss or write down in points format all the arguments. Hint: Use the various arguments discussed in class: Economic, Political, Multilateral/repercussions. Part B (5 points) Using the specific factor model show what would happen to the wage rate in Canada in the following scenario: Canada's immigration is points based. An immigrant has to obtain a certain minimum level of points to be considered. Some of the situations that can get you points are : Close relatives in Canada (4 points) Level of Education (Engineering or a doctorate- 5 points) Work experience ( 3 years or above - 3 points) education level of the Spouse ( graduate or above - 3 points), etc. Suppose the Canadian government changes the point system such that it now allocates 15 points for your own level of education and 10 points for spouse education.what this does is two things a) increases the number of immigration into Canada (as it would be easier to get the minimum points to apply for immigration. b) The increase in immigration is for the highly educated personnel. Show on you graph for the specific factor model - what would change and how the wage would be effected. 17) Do one of the following parts. Either Part A or Part B. Part A Some twenty years ago, NBA players in the US-both playing and incoming through the draft-were exclusively US nationals. One could argue that the NBA draft then was like a closed domestic market. Suppose the domestic demand for professional basketball players then could be denoted by Q(demand)=200-4p and the supply of US players was Q(supply)=40p-240 where p was the price of wage of each player in US$ million and Q denoted the number of players recruited each year in the draft. a) (2 points) Calculate the equilibrium Price and Quantity of the number of Draft recruits joining the NBA each year. b) (2 points) Foreign players were lured by the high wages earned by NBA players. This coincided with changes in NBA regulations. These foreign players could now be drafter by NBA franchises- the opening up of foreign players shifts supply curve to Q(supply) =40p-20 calculate the new equilibrium price and Quantity. c) (3 points) Calculate the change in consumer surplus? OR Part B (7 points) Use the PPF graph from the Heckscher-Ohlin model to answer the following question: Canada is richly endowed in human-capital (Skilled Workers) relative to Mexico, then as NAFTA increasingly leads to more bilateral free trade between the two countries, show what happens to country's production and consumption before and after NAFTA. Use the production possibility frontier (general equilibrium framework) to show country's consumption and production before and after free trade, make sure you label the graph properly including relative prices and indifference curves. 5
18) (4 points) Explain graphically what happens when a small country like Thailand gives export Subsidy to its shrimp exporters. a) (2 points) On your graph show the change in Consumer Welfare when Thailand moves from free trade to export subsidy. b) (1 point) Is the move(from free trade to export subsidy) welfare improving or welfare reducing (Total Welfare) for Thailand? c) (1 point) Does it effect the shrimp consumers in Canada? d) (2 points) What if it was China (large country in Shrimp Market) giving export subsidy to its shrimp exporters- How would this effect shrimp consumers in Canada? 6