Trade in small and large countries
You have 2.5 hours to complete this exam. Please submit as a PDF through Canvas.
 
Be sure to label your graphs and link any writen answer to any required graph.
 
1. Analyze the following two countries with linear production technologies and one factor of production. The production technology is given by the following labor requirements:
 
                                                   
 
Hot Dogs (labor per unit)           1           3       
 
Maple Syrup (labor per gallon) 2           1
 
Each country has 600 hours of labor.
 
a. Which country has the absolute advantage in producing hot dogs? Explain.
 
b. What is the opportunity cost of hot dogs in the US? In Canada?
 
 c. Which country has a comparative advantage in each good? Explain.
 
d. What is the range of prices for each good under which both countries will gain from trade? Explain.
 
e. Suppose that the world price of a unit of hot dogs is 1 gallon of maple syrup. Draw a large, clear new graph for each country (put hot dogs on the X axis) showing the autarky equilibrium and the free trade equilibrium (including the trade triangle showing the levels of imports and exports).
 
f. Who gains from free trade in this model? Brie?y explain why or why not.
 
2. In January 2018, Trump approved a 30% tari? on the imports of solar panels based on Section 201 of the Trade Act of 1974.
 
a. Assume that the US is a small country in the solar panel industry. Draw a diagram depicting the US. solar industry moving from free trade to a tari? of 30% per unit. For both free trade and the tari?, identify the equilibrium price, equilibrium quantity consumed domestically, equilibrium quantity produced domestically, and imports on your graph.
 
 b. Using the graph you drew in part a, explain what happens to consumer surplus, producer surplus, tari? revenue, and total surplus as a result of the tari?. Have producers been made beter o? by the tari?? Have consumers been made beter o? by the tari?? Explain.
 
 c. Identify and explain the source of the production and consumption distortions.
 
 3. “The U.S. taxes the foreign pro?ts of U.S. MNEs at roughly half the rate as on domestic pro?ts. Nowadays this happens primarily through a combination of two provisions from the 2017 tax law, known by their acronyms, GILTI and FDII. Roughly speaking, GILTI taxes the pro?ts that U.S. MNEs earn through foreign subsidiaries at 10.5 percent rather than the full 21 percent corporate rate. FDII gives a similar bene?t for export pro?ts earned directly from the U.S.”
 
a. Of the trade policy tools discussed in class (e.g. import tari?, import quota, VER, export subsidy), which one best describes these tax measures?
 
b. Suppose the chemical industry in the US (a large country) is subject to this policy. On a supply and demand diagram of the US market for chemicals, illustrate the economic (welfare) e?ects of the imposition of this policy on the export of chemicals.
 
c. You are an analyst in the International Trade Administration, and your boss emails you asking you to evaluate the economic e?ects of this trade policy. Write a brief (approx. eight sentences) email response to your boss.
 
d. Your boss will be meeting with a representative from the IMF about the organization’s concerns regarding the “economic distortons and e?ciency e?ects” of the policy. Write a brief (again, approx. eight sentences) email to your boss explaining the IMF’s potential concerns.