Part A:
1. The production process for Bicycles can be described as taking Components and adding value to transform these into a Bicycle. The Home country applies a 20% import tari¤ at both stages of the production process: C = B = 20%. Comment on the E¤ective Rate of Protection on Bicycles for the case where (i) Home is a small country with respect to both Components and Bicycles, (ii) Home is a small country with respect to Components and a large country with respect to Bicycles, and (iii) Home is a large country with respect to Components and a small country with respect to Bicycles.
2. Consider a world with two goods, Cloth (C) and Food (F). There are 2 countries, Home and Foreign. Home has a comparative advantage/is e¢ cient in the production of Cloth. Capital (K) is speci?c to the production of Cloth, Land (T) is speci?c to the production of Food and Labour (L) is freely mobile and required for the production of both goods. If Home?s Labour force increases from L to ^L; use a graph to show what happens to the Home wage and employment in both industries when PC and PF do not change. Explain what will happen to the earnings/returns to all 3 factors, Labour, Capital, and Land.
3. Firm A from Home and ?rm B from Foreign compete in the world market for large water turbines (selling to other countries in the world). The world market is not large enough to support two ?rms. Explain whether, and under what conditions, the Home country may be able to employ strategic trade policy in a way that will work to the advantage of Firm A and be welfare-enhancing for Home.
4. Home is a small country with a monopoly ?rm operating in the import-competing industry. The Home government considers two instruments of trade policy: a tari¤ t and a quota Q. Both the tari¤ and the quota lead to the same volume of imports, Qt = Q. Compare the size of the distortionary losses at Home under these two trade policies.
PART B:
1. Tari¤s in a Large Country Home is a large country with respect to the market for barber chairs. The demand for barber chairs in the Home country is Qd = 6000 2P. The supply of barber chairs at Home is Qs = 2P 2000. The foreign Export Supply of barber chairs is QXS = 3P 750.
(a) Determine the import demand function for barber chairs in the Home country. What is the autarky price of a barber chair at Home? Compare this with the autarky price for a barber chair in the foreign country?
(b) Determine the change to welfare (total surplus) for both the Home and the Foreign country in moving from autarky to free trade in barber chairs. Which country sees a larger increase in surplus?. [Hint: it may be useful to sketch the import demand and export supply functions.]
(c) The Home government is proposing legislation that would see a speci?c tari¤, t = $1000 placed on the import of barber chairs from the foreign country. Determine the price in both Home (Pt) and Foreign (P t ) with the tari¤ in place as well as the volume of imports, Qt.
(d) Calculate the net change to welfare for the Home country that will result from the tari¤ described in (c). Suppose that before the Home country can put in place the tari¤ the Foreign country imposes an export tax e = $1000 on exports of barber chairs out of Foreign. Explain what, if any, changes this will have to prices in home and foreign and volume of trade (compare Pt with Pe ; P t with P e and Qt with Qe). Calculate the net change to Home?s welfare when Foreign uses an export tax. (6 marks)
2. Monopolistic Competition Suppose that all ?rms in a monopolistically competitive industry have the same cost structure. The ?xed costs of production are F = $50; 000 and the variable cost (constant marginal cost) is c = $1; 000. The size of the home market is S = 98; 000; and the size of the foreign market is S = 190; 000. The demand facing an individual ?rm is a function of its own price, P, as well as the average price of its rivals, P: Q = S
1
n
1
25
(P P)
(a) Explain what type of trade the model of monopolistic competition helps us to describe.
(b) Find the relation between the number of ?rms in the market and the average costs of production (CC curve) for the home market (S = 98; 000)
(c) The equation for the PP curve can be expressed as: P = 1000 + 25 n
Explain brie?y what relation this curve is describing. Explain brie?y the economic rationale underlying equilibrium in the model of monopolistic competition. Find the equilibrium in the home market (P and n).
(d) When there is trade between home and foreign, what is the size of the integratedmarket? Use a graph to show how CC and/or PP change and to describe qualitatively how equilibrium changes relative to (c). Describe the ways in which consumers in the home market bene?t from trade.
3. Ricardian Model A Ricardian world economy consists of two countries, Home and Foreign. There are two production goods, Wheat (W) and Steel (S) and a single factor of production, labour (L). The technology of production can be described by constant unit-labour requirements that di¤er across goods and across countries as follows:
Wheat Steel Labour
Home aLW = 3 aLS = 4 L = 1200
Foreign aLW = 1 aLS = 2 L = 800
(a) For which country is the opportunity cost of producing Wheat lowest? Explain. (4 marks)
(b) Use a diagram withWheat on the horizontal axis to show the production possibilities frontier for Foreign. Be sure to include the values of any intercepts and the slope. (4 marks)
(c) With voluntary trade between Home and Foreign, describe the pattern of specialization and trade (which goods are produced by each country, which goods are exported by each country, which goods are imported by each country).
(d) Suppose that in addition to Wheat and Steel, there are two additional goods that are produced: Radios (R) and Toys (T). Unit labour requirements for these goods are as follows:
aLR = 8, aLR = 12, aLT = 1
2 , aLT = 1
2 . In equilibrium, Home?s wage relative to Foreign?s is
w
w = 3
4 . Describe the pattern of trade. Now let suppose there are transport costs, z = 40%, that must be incurred when a good is exported to another country. Determine what, if any goods, become non-traded.
PART C:
Read the following excerpts from a recent article in the New York Times (?U.S. Gains in a Spat With China Over Tari¤s?by Annie Lowrey and Keith Bradsher, May 23, 2014). WASHINGTON - The World Trade Organization sided with the United States on Friday in a
dispute over punitive Chinese tariffs on American exports of cars and sport utility vehicles.
China imposed antidumping tariffs of 2 to 8.9 percent on American cars and S.U.V.s with an engine displacement of more than 2.5 liters in December 2011, saying that these vehicles were being sold to dealers in China for less than the full cost of manufacturing them. China also imposed additional antisubsidy tariffs of 12.9 percent on largeengine passenger vehicles from General Motors and 6.2 percent on these vehicles, mainly Jeeps, from Chrysler.
Beijing contended that the governmentmanaged bankruptcies of G.M. and Chrysler had the effect of providing subsidies for these manufacturers' exports.
The W.T.O. ruling is the third in favor of the United States in recent years. Beijing and Washington have also disagreed on trade terms for broiler chickens, rare earth minerals, tires, steel and auto parts. A separate W.T.O. panel is considering an American complaint that China has subsidized exports of car parts to the United States.
1.
(a) Under the articles of the GATT agreement, under what circumstances can oneWTO member raise import tari¤ rates on goods that are exported by another WTO member?
(b) What is dumping? If American cars and S.U.V.s with an engine displacement of more than 2:5 liters were being sold to dealers in China for less than the price the same vehicles were sold to dealers in the United States explain, using graphs, whether there is an economic justi?cation for such action by the American car manufacturer (GeneralMotors or Chrysler).
(c) Provide a graphical analysis for both the American (Home) and Chinese (Foreign) market for cars and S.U.V.s with an engine displacement of more than 2:5 liters when the U.S. provides a production subsidy to car producers and China imposes an anti-subsidy tari¤. Assume both countries are large and industries are perfectly competitive. Comment on how your analysis might di¤er if the American industry was assumed to be a monopoly.