Answer all five questions in one file. Each question is worth 20 marks. Keep your answer concise. Use figures to illustrate your point wherever possible. Show all your work and attach your graphs when submitting your assignment for grading and feedback.
1. Suppose the free trade market price of a car is $20,000. It contains $10,000 worth of steel. The importing country imposes 25% tariff on car imports.
a. Calculate the effective rate of protection if there is no duty on steel imports.
b. Calculate the effective rate of protection if the importing country imposes a 20%
tariff on steel imports.
c. Suppose it also takes $4000 worth of copper (besides $10,000 worth of steel) to produce a car. Calculate the effective rate of protection if there is no import tariff on the imports of either steel or copper.
d. Suppose there is import duty of 20% and 15% on imports of steel and copper, respectively. Calculate the effective tariff rate.
2. Explain how the Krugman model of trade works. Explain the similarities and differences between the Krugman model and Heckscher-Ohlin model.
3. Explain the difference between the price and the physical definitions of factor abundance. When could they give conflicting answers about which factor is the abundant factor?
4. Illustrate how the Linder theory of trade works. Explain similarities and/or differences between the Linder model and Heckscher-Ohlin model.
5. Using a general equilibrium approach, point out the real income loss from a tariff to a country. What is the consumer welfare loss? Why might consumers prefer a production subsidy rather than a tariff?