International Economics Midterm Exam

12 December 2016

Points allocated to a question are shown in brackets beside the question for a total of 100. Answer ALL questions. Calculators and other electronic devices may NOT be used during the exam. 1. Wages differ greatly across countries and they depend, to some extent at least, on productivity differences. Suppose Canada and Japan produce two types of goods: agricultural goods, such as wheat, and manufactured goods, like cars.

In Canada it takes a worker 1 day to produce a ton of wheat, and 2 days to produce a car, while in Japan it takes 3 days to produce a ton of wheat and 1 day to produce a car. Canada has a comparative advantage in the production of wheat, so with free trade Canada will produce and export wheat and Japan will produce and export cars. (20) (a) Suppose the free trade price of a ton of wheat is 1 car. (i) (ii) (10) What is the pre-trade wage in Canada, measured in tons of wheat? What is the pre-trade wage in Canada, measured in cars? What is the free trade wage in Canada, measured in tons of wheat?

What is the free trade wage in Canada, measured in cars? What is the pre-trade wage in Japan, measured in tons of wheat? What is the pre-trade wage in Japan, measured in cars? What is the free trade wage in Japan, measured in tons of wheat? What is the free trade wage in Japan, measured in cars? (b) Suppose now the free trade price of a ton of wheat is 3 cars.

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What is the free trade wage in Canada, measured in tons of wheat? What is the free trade wage in Canada, measured in cars? What is the free trade wage in Japan, measured in tons of wheat? What is the free trade wage in Japan, measured in cars? (10) age. in. Canada when the price of a ton of wheat is 1 car?

What is it when wage. in. Japan the price of a ton of wheat is 3 cars? Is it possible that the wage in Canada could be maintained at a level 4 times as high as the wage in Japan? Explain why or why not. In your answer, consider whether Japan would want to import Canadian wheat in this case. (c) What is the ratio © 2010 C Smith 1 2. A number of countries, particularly in Asia, have pursued development strategies of exportpromotion. By selling in world markets, which are much larger than the domestic market, firms can gain economies of scale. (10) a) Describe in words what it means if an economy exhibits the technological situation of “increasing returns to scale.

Explain the difference between economies of scale that are internal to the firm, and economies of scale that are external to the firm but internal to an industry. (5) (b) (i) Say the domestic country produces two goods, computers and televisions, with increasing returns to scale. Draw the domestic country’s production possibilities frontier (PPF). In your figure, denote the country’s level of output of when all factors are allocated to computers as C , and when all factors are allocated to televisions as T .

On the axes, show the points ? C , and ? T . Finally, denote as point P on the PPF the point where half the country’s resources are allocated to the production of each of computers and televisions, and on the axes denote these points as C0 and T0, respectively. (10) (ii) Suppose the pre-trade or autarky price of televisions in terms of computers is the same as the world (free trade) relative price. Can there be gains from trade in this case? Explain why or why not. Do you think export-promotion can be successful at increasing economic output of a country? 3.

Gains from trade can be categorized into consumption gains and production gains. Suppose the domestic country produces two goods, food and clothing, with increasing opportunity cost. (5) (a) Draw the production possibilities frontier for this country. Denote the pre-trade or autarky production point as point A. How do you know this is the optimal production point? (15) (b) Suppose the world relative price of food in terms of clothing is higher than the domestic country’s autarky price. Show the new optimal production point, and denote it point P. Denote the new, optimal consumption point as point.

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