International Trade and Financial Markets questions Do not copy and paste from my notes and/or other sources. This will be considered cheating, I like to s

International Trade and Financial Markets questions Do not copy and paste from my notes and/or other sources. This will be considered cheating, I like to see how you answer the question using your own words. Submit only one document. Do not copy and paste from my notes and/or other sources. This will be considered cheating, I like to see
how you answer the question using your own words. Submit only one document.
1. The table below shows the bushels of corn and bottles of wine that Japan and Korea can produce from
one day of labor under three different hypothetical situations.
Product
Corn(bushels)
Wine(bottles)
Case 1
Japan
4
2
Korea
2
1
Case 2
Japan
4
3
Korea
1
2
Case 3
Japan
4
2
Korea
1
2
a. (4.0 pts) Use the table above to show for each case the commodity in which each country has
a comparative advantage or disadvantage. Show your work. Answer the question by
calculating relative prices.
Answer:
b. (2.0 pts) Indicate in each case whether or not trade is possible. Which commodity each
country exports? You must explain your answer.
Answer:
c. Suppose in case 2, Japan exchanges 4 bushels of corn for 4 bottles of wine with Korea.
1. (2.0 pts) How much does Japan gain? Show your work.
Answer:
1
2. (2.0 pts) How much does Korea gain? Show your work.
Answer:
3. (3.0 pts) What is the range for the terms of trade for corn? What will happen if the TOT
for corn is ¾ of wine? Will nations trade and why.
Answer:
2. (3.pts) How would you counter the argument that the United States needs to restrict textile imports in
order save American jobs?
Answer:
3. (3.0 pts) With the constant level of world resources, international trade brings about an increase in
total world output. Explain why this statement is true.
Answer:
2
4. (3.0 pts) Can complete specialization take place under increasing cost opportunity? Explain why.
Answer:
5. (4.0 pts) Assume production takes place under constant opportunity costs. Draw two sets of axes, one
for Nation 1 and the other for Nation 2. Draw two identical PPS’s, one for each country. Determine
the comparative advantage for each country (nation I and nation II) if taste and preferences are
different (i.e., each country has a different set of taste and preferences. Label you graph carefully.
Answer:
6. (3.0 pts) What is the basis for trade in the Linder’s trade theory? Who are the major trade partners for
the exporting country? Do not put everything you know about the Linder’s theorem and ask me to
find the answer.
Answer:
3
7. (5.0 pts) Discuss the significance of the assumption of “identical preferences and tastes” in the factor
endowment theory. Will the H.O theory collapse if tastes and preferences are different between the
two nations? For the latter question, draw a graph to show it graphically. Explain
Answer:
8. (2.0 pts) Explain why in intra-industry trade all factors of production will gain.
Answer
4
9. (3.0 pts) Suppose the foreign supply for good X is price elastic. Suppose further that the home
country imposes a tariff on good X. Who pays the tariffs? Consumers in the importing country?
Producers in the exporting country? Explain carefully.
Answer:
10. (3.0 pts) How does the elasticity of domestic demand and supply influence the size of the deadweight
loss of an import tariff? What will happen to the deadweight loss as the demand and supply become
price inelastic?
Answer:
11. (3.0 pts) Which tends to result in a greater welfare loss for the home economy: (a) an import quota
levied by the home government or (b) a voluntary export quota imposed by the foreign government?
Elaborate your answer.
Answer:
5
12. (4.0 pts) Describe why an import quota is far worse than an equivalent tariff in terms of welfare effect
if the demand for the quota-constrained product increases over time. Do your analysis under two
scenarios: (1) tariff, (2) quota. Do NOT draw a graph.
Answer:
13. (4.0 pts) Assume that two nations trade with each other. The free trade price is $20 and the volume of
trade is 75 units. Now introduce a $10 transport cost which will reduce the volume of trade to 35
units. Show that in the presence of transport costs, the steeper are the domestic demand and the
supply curves for a tradable good, the greater is the burden of transport costs on the home nation.
Discuss and show graphically.
6
14. (4.0 pts) Analyze the economic effect of a subsidy provided by the national government on a particular
export commodity in a small nation. Draw a graph. Suppose at the free trade price of $400, the domestic
production is 45 units and the domestic consumption is 20 units. A subsidy of $100 is granted to each
unit exported. Production increases to 55 units and exports increase to 40 units. Show the welfare
effect of such policy (i.e., the loss in CS, the gain in PS, the cost of the subsidy, and the welfare loss).
Answer:
7

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