Econ midterm

Question 1

Ricardian assumptions(6 items)

Answer 1

2 countries 2 goods 
-1 factor (labor)
-competitive markets
-free trade-
-constant MPL (straig
ht PPF)
-Labor moves b/w industries but not across countries straight ppf

Question 2

Ricardian impact of trade on relative prices

Answer 2

If home has comparative advantage in good x then Px/Py goes up due to trade because relative price of x goes up

Question 3

Ricardian Predictions

Answer 3

Each country would fully specialize in producing the good in which it has comparative advantage+ all factors gain from trade (higher welfare)

Question 4

ricardian Impact of trade on returns to factor

Answer 4

Labor experience increase in nominal and real wages

Question 5

specific factors model explains trade based on

Answer 5

differences in technology

Question 6

Specific factors: Assumptions( 4 items)

Answer 6

• 2 countries 2 goods
• 3 factors capital to manufacture land to agri and labor used in both
• Competitive markets
• free trade
• diminishing returns concave PPF

Question 7

Specific Factors impact of trade on prices

Answer 7

if home has comparative advantage in manufacturing PM/PA goes up as a result of trade

Question 8

Specific factors predictions

Answer 8

-the increase in relative price of an industrys output increases the real rental earned by the factor specific to that industry and decreases the rental of the factor specific to the other industry

Question 9

Specific factor impact of trade on returns to factors

Answer 9

capital gains rental on capital goes up
land owners lose in real terms rental on land goes down
impact lof labor is ambiguous real wages agri go up and real wages manu go down

Question 10

H-O explains trade based on

Answer 10

difference in resources

Question 11

H-O:assumptions(6 items)

Answer 11

• 2 countries Home is capital and foreign is labors
• 2 industries computers capital and shoes labor
• 2 factors labor and capital
• factors move freely
• diminishing returns concave PPF
• Free markets and free trade with identical tech and homogenous preferences.

Question 12

H-O: impact of trade on prices

Answer 12

if homes is capital abundant then PC/Ps goes up

Question 13

H-O: Predictions

Answer 13

each country exports the good that uses intesively its abundant factor of production and imports the other good

Question 14

H-O impact of trade on factors

Answer 14

real rentals on capital increase b/c relative price increase but real wages fall

Question 15

Stolper-Samuelson theorem: H-O model

Answer 15

an increase in the relative price of a good leads to an increase in returns of the factor used abundantly in producing that good and decreases the return to the other factor.

Question 16

Leontief Paradox

Answer 16

The major thing is Leontief found the opposite of H-O theory when using US data on year 1947… several explanations are given… the solution of the paradox is to compute effective K/L ratio as opposed to just K/L ratio because factor productivity differs greatly across countries.

Question 17

Factor intensity theorem

Answer 17

In the HO model with two goods and two factors, an increase in the amount of a factor found in an economy can be absorbed by changing the outputs of the industries, without any change in the factor prices.

Question 18

Rybzcenski theorem

Answer 18

In the H-O model with two goods and two factors, an increase in the amount of a factor found in an economy will increase the output of the industry using that factor intensively and decrease the output of the other industry.

Question 19

Nash outcome

Answer 19

if countries are given autonomy to tariff as they please the worst possible outcome in terms of overall welfare will be achieved

Question 20

specific factor model losing labor and gaining labor

Answer 20

higher wages but lower rentals and output for agri and manu if you gain people from immigration the opposite holds true lower wages but higher rentals and output for agri and manu

Question 21

impact of immigration in the short run

Answer 21

wages decrease increase in both RPk RPt and output for both industries

Question 22

impact of immigration in the long run

Answer 22

no effect on wages no effect to other factors because of factor price intensity theorem and output of labor intensive industry increase while output of capital intensive industry decrease(Rybzcenski theorem)

Question 23

impact of FDI in the short run

Answer 23

increase in wage but decrease in both RPk and RPt output of manufacturing increases but output of agri shrinks since it is a capital injection

Question 24

long run FDI effects

Answer 24

no effect on wages and does not affect returns to other factors (Factor intensity theorem) output of capital intensive industry increases and output of the land industry decreases(rybzinski theorm)

Question 25

why do countries impose trade barriers: Dumping

Answer 25

the sale of goods abroad at a price below the cost of production

Question 26

area b and d in tariff diagram

Answer 26

production loss and consumption loss

Question 27

allocation for quota rents

Answer 27

giving quota to home firm, rent seeking, auctioning the quota, voluntary export restraint`

Question 28

Tariffs in a small country( 4 items)

Answer 28

- small country takes world price as given - tariffs increase producer surplus reduce consumer surplus - tariffs create deadweight loss( areas b and d) - so small countries shouldnt impose tarriffs

Question 29

tariffs in a large country(5 items)

Answer 29

- a large economy affects world price - upward sloping export curve - economy can benefit due to area C - needs to find the optimal tarrif or risk loss - the rest of the world loses when a country tariffs

Question 30

1. giving the quota to home firms

Answer 30

permits to import the quantity allowed under the quota system can be given to home firms home firms earn rent - fall in consumer surplus -(a+b+c+d) - rise in producer surplus +a - quota rents earned at home +c - net effect on home welfare -(b+d)

Question 31

2 rent seeking

Answer 31

if rents are allocated for production firms will produce more then they will sell just to get rents - fall in consumer surplus -(a+b+c+d) - rise in producer surplus +a - net effect on Home welfare -(b+c+d)

Question 32

3 Auctioning the quote

Answer 32

the governement of the importing country can auction the license - Fall in consumer surplus: − (a + b + c + d) - Rise in producer surplus: + a - Auction revenue earned at Home + c - Net effect on Home welfare: − (b + d)

Question 33

4. voluntary export restraint

Answer 33

importing country gives authority for quota - Fall in consumer surplus: − (a + b + c + d) - Rise in producer surplus: + a - Net effect on Home welfare: − (b + c + d)

Question 34

return with forward

Answer 34

initial currency*(F/S)*(1+i(d)) where i is the rate of the country you are looking for

Question 35

currency denominated return

Answer 35

p*(1+i(f)) where i is the rate of the other country ie

Question 36

CIP=

Answer 36

S* (i(d)/i(f))=dperf or (1 + id) = (S / F) * (1 + if). Oc stands for other country and c stands for country dperf stand for country per other country

Question 37

forward premium

Answer 37

CIP/spot

Question 38

how to find the nominal effective exchange rate

Answer 38

find the percentage change in the two years for each currency multiply the change by the share % and then get the sum of all the numbers

Question 39

UIP

Answer 39

(F/S)*(1+i(f)) where i is the interest rate for the country it is asking

Question 40

riskless denominated return using forward cover

Answer 40

p*(F/S)*(1+i(d))