Econ 334: International Trade
Department of Economics
University of Massachusetts Boston
Fall 2020
Assignment II – Problem Sets
Due on Friday, December 18th on BB course page before 11 p.m.
Chapter 7
1. What type of occupation would you like to pursue after graduation? To see what is available, go to the Bureau of Labor Statistics website at: https://www.bls.gov/ooh/.
a. Find four occupations that you think fit the four categories shown in the horizontal axis of Figure 7-11: nonroutine manual jobs; routine manual jobs; routine cognitive jobs; and nonroutine cognitive jobs. For each occupation, what is the growth in employment in the United States, and how does it compare with the employment growth since 1990 shown in Figure 7-11?
b. Choose an occupation that you would most likely to pursue and explain why you wish to pursue it.
c. What is the employment growth for the occupation you chose in part b above? Explain why employment grew like that.
2. Consider an offshoring model in which Home’s skilled labor has a lower relative wage than Foreign skilled labor, and the costs of capital and trade are uniform across production activities.
a. Will Home’s offshored production activities be high or low on the value chain for a given product? That is, will Home offshore production activities that are high-skilled-intensive, or low-skilled-intensive? Explain.
b. Suppose that Home uniformly increases its tariff level, effectively increasing the cost of importing all goods and services from abroad. How does this affect the slicing of the value chain?
c. Draw relative labor supply and demand diagrams for Home and Foreign showing the effect of this change. What happens to the relative wage in each country?
Chapter 8
3. Consider a small country applying a tariff t to imports of a good like that represented in Figure 8-5.
a. Suppose that the country decides to increase its tariff to t′ (but not high enough to total block imports). Redraw the graphs for the Home and import markets and illustrate this change. What happens to the quantity of goods produced at Home and their price? What happens to the quantity of imports?
b. Are there gains or losses to domestic consumer surplus due to the increase in tariff? Are there gains or losses to domestic producer surplus due to the increase in tariff? How is government revenue affected by the policy change? Illustrate these on your graphs.
c. What is the overall gain or loss in welfare due to the policy change?
4. Optimal tariff rate
a. If the foreign export supply is perfectly elastic, what is the optimal tariff Home should apply to increase welfare? Explain.
b. If the foreign export supply is less than perfectly elastic, what is the formula for the optimal tariff Home should apply to increase welfare?
c. What happens to Home’s welfare if it applies a tariff higher than the optimal tariff?
d. What happens to Home’s welfare if it applies a tariff lower than the optimal tariff?
Chapter 9
5. Briefly describe/define the following terms as they relate to international trade.
a. Export subsidy
b. Dumping
c. Anti-dumping duties
d. Countervailing duties
e. Safeguard tariff
6. Figure 9-1 shows the Home no-trade equilibrium under perfect competition (with the price PC) and under monopoly (with price PM). In this problem, we compare the welfare of Home consumers in these two situations.
a. Under perfect competition, with the price PC, label the triangle of consumer surplus and the triangle of producer surplus. Outline the area of total Home surplus (the sum of consumer surplus and producer surplus).
b. Under monopoly, with the price PM, label the consumer surplus triangle.
c. Producer surplus is the same as the profits earned by the monopolist. To measure this, label the point in Figure 9-1 where the MR curve intersects MC at point B′. For selling the units between zero and QM, marginal costs rise along the MC curve, up to B′. The monopolist earns the difference between the price PM and MC for each unit sold. Label the difference between the price and the MC curve as producer surplus, or profits.
d. Outline the area of total Home surplus with a Home monopoly.
e. Compare your answer with parts (a) and (d), and outline what the difference between these two areas is. What is this difference called and why?
Chapter 10
7. Suppose Home is a small exporter of wheat. At the world price of $100 per ton, Home growers export 10 tons. Now suppose the Home government decides to support its domestic producer with an export subsidy of $50 per ton. Use the following figure to answer these questions.
a. What is the quantity exported under free trade and with the export subsidy?
b. Calculate the effect of the export subsidy on consumer surplus, producer surplus, and government revenue.
c. Calculate the overall net effect of the export subsidy on Home welfare.
8. Suppose that Home is a large country. Continue to assume that the free-trade world price is $100 per ton and that the Home government provides the domestic producers with an export subsidy in the amount of $40 per ton. Because of the export subsidy, the local price increases to $120, while the foreign market price declines to $80 per ton. Use the following figure to answer these questions.
a. Relative to the small-country case, why does the new domestic price increase by less than the amount of the subsidy?
b. Calculate the effect of the export subsidy on consumer surplus, producer surplus, and government revenue.
c. Calculate the overall net effect of the export subsidy on Home welfare. Is the large country better or worse off compared with the small country with the export subsidy? Explain.
Chapter 11
9. Assume that Thailand and India are potential trading partners of China. Thailand is a member of ASEAN, but India is not. Suppose the import price of textiles from India (PIndia) is 50 per unit under free trade and is subject to a 20% tariff. As of January 1, 2010, China and Thailand entered into the China–ASEAN free-trade area, eliminating tariffs on Thai imports. Use the following figure to answer the questions:
a. Before the China–ASEAN free-trade area, how much does China import from each trading partner? What is the import price? Calculate the tariff revenue.
b. After the China–ASEAN free-trade area, how much does China import from each trade partner? What is the import price? What is the total tariff revenue of China?
c. Based on your answer to part (b), what is the impact of the China–ASEAN free-trade area on the welfare of China?
d. What is the effect of the China–ASEAN free-trade area on the welfare of Thailand and India?
e. The China-ASEAN agreement may lead to a similar one between China and India. How would this affect China’s imports from each country? What would be the effect on welfare in China, Thailand, and India if such an agreement was signed?
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