Part A:

1. In a two country world, if the home country has a comparative advantage in current consumption (relative to future consumption), explain what will happen to the interest rate at home when there is free trade in ?nancial capital.

2. The following is an excerpt from an article in the Globe and Mail. Explain whether a free-trade agreement which increases the percentage of African trade carried out within Africa will necessarily increase welfare for each African nation.

Geoffrey York
African trade deal needs more than good intentions
GEOFFREY YORK
JOHANNESBURG- Globe and Mail Blog
Posted on Wednesday, June 15, 2011 1:15PM EDT

It was hailed as a "historic" agreement: a freetrade deal to create Africa's biggest trade bloc, knocking down barriers and uniting 26 countries with a combined population of nearly 600 million and a combined economy of $875billion.

The deal was announced in Johannesburg last weekend at a summit of three regional organizations, representing the countries of southern and eastern Africa. They are aiming to negotiate the details of the "grand free trade area" within the next three years.

There's no question that a freetrade agreement could have huge benefits for Africa. The continent is plagued by fragmented economies, bureaucratic barriers to trade, corruption at border posts, and a failure to exploit the natural advantages of geography. Only about 10 per cent of Africa's trade is within Africa an absurdly small number. (By comparison, 60 per cent of European trade and 40 per cent of North American trade is produced by internal trade within their regions.)

3. What are dynamic increasing returns to scale? Explain what e¤ect they might have on patterns of trade.

4. In a two country world, explain how freely mobile labour, between the two countries, can lead to an increase in world output. Do all workers bene?t from this?

5. Home is a small country that exports a good. Production of the good also leads to a negative production externality while consumption of the good leads to a positive consumption externality. Explain if there is trade policy that can help to improve on this problem.

PART B:

1. Monopolistic Competition The market for automotive parts is a monopolistically competitive market. The cost functions of all ?rms are identical: C(q) = 20000+50q; with constant marginal costs, c = $50. Demand functions for each of the ?rms are also identical.

(a) In the home country in autarky, the equilibrium price is PA = $150 and the equilibrium number of ?rms is nA = 5. What is the size of the home market, S?

(b) In the foreign market, S = 4000. Explain whether the autarky price in foreign, PA will be greater or less than home?s autarky price. In this model, explain whether trade is expected to lead to a world price that lies between the home and foreign autarky prices.

(c) When there is free-trade between home and foreign explain whether the number of ?firms worldwide will increase or decrease? What will happen to the equilibrium number of ?rms and price in the home country?

(d) Describe the bene?ts from trade in this model.

2. Effective Rate of Protection Answer the following questions concerning the Effective Rate of Protection.

(a) Home is a small country. The world price of a good is PW = $20. The cost of all inputs in the production of the good is c = $5. If the home country places a 50% tariff on the good, ?find the effective rate of protection.

(b) Home is a small country. Under free-trade, home imports a good at world price PW = $100. The cost of inputs used in the production of the good are c = $80. Home imposes a tari¤-rate quota on the good, setting the in-quota tariff at t = 20%, the over-quota tariff at to = 80% and the quota level at Q = 1000. Determine a range for the effective rate of protection.

(c) Read the following excerpt of an article from the New York Times:

W.T.O. Ruling on Airbus Subsidies Upheld on Appeal

An A380 airliner leaves an Airbus plant near Hamburg, Germany. A panel said loans to develop the plane were not granted because of hopes of sales overseas.

By NICOLA CLARK

A World Trade Organization appeals panel on Wednesday upheld a ruling that Boeing lost market share to its European rival, Airbus, as a result of billions of dollars in lowcost government loans, according to European and American officials.

But the panel rejected claims by the United States that state financing for the Airbus A380 superjumbo jet was automatically prohibited under global trade rules, the officials said.

Appeals judges at the trade body, which is based in Geneva, concurred with the initial finding that loans extended to Airbus over the course of four decades did constitute unfair subsidies that had caused Boeing to lose aircraft sales.

The article mentions that loans to Airbus constituted unfair subsidies. Suppose the loans can be measured as a subsidy rate s. Explain whether the effective rate of protection to European aircraft manufacturing would be greater than or less than s.

(d) Production of bicycles requires the input of bike parts. If home places an import tariff on bike parts comment on the relative sizes of the effective rate of protection on bicycles for the case where home is a large country with respect to bike parts and when home is a small country with respect to bike parts.

3. Trade Policy Home is a large country. The demand for guitars in the Home country is QD = 2000  2P: The supply by domestic manufacturers is QS = 1 2P. The export supply function of the Foreign country is XS = 5P  1000.

(a) Determine the autarky price of a guitar in both home, PA and foreign, PA.

(b) Find the free-trade equilibrium price PW. How many guitars is the foreign country exporting?

(c) Home imposes a quota on guitar imports by licensing speci?c domestic fi?rms as the sole importers of the good. The quota is set at Q = 800. Determine the new price at home, PQ; and the price in foreign, PQ . Calculate the net e¤ect of the quota on Home?s welfare.

(d) Suppose that the guitar industry in the Home country is a monopoly where the monopolist has marginal costs, mc = 2q. Find the price in the home market with the quota, Q = 800 in place.

PART C:

1. Read the following editorial that appeared in the New York Times (June 7, 2011).

Answer the questions that follow.
Editorial
Keeping Protectionism at Bay
Published: June 7, 2011

The world's big trading nations have done a fairly good job over the last two years of resisting protectionism even as their economies stalled or shrank. But their patience with open markets seems to be wearing thin.

With growth still slow and unemployment high, many developed countries are resorting to measures that restrict imports - from antidumping investigations to tariff increases. This must stop.

The World Trade Organization has been monitoring new trade restrictions since the Group of 20 industrialized nations promised to refrain from protectionism in 2009. It found that between October 2010 and April 2011, these nations imposed 122 new restrictions affecting about 0.5 percent of world imports. That is more than twice as many as in the period between May and October 2010. This trend does not yet threaten global trade, which expanded by more than 14 percent last year, according to the W.T.O. But it indicates an erosion of the discipline that kept world markets open through the downturn and prevented protectionism from further denting global growth.

Every country has given in to temptation to some degree. Brazil increased tariffs on tools and toys. China opened antidumping investigations against American grain imports and imports of photographic paper from the United States, the European Union and Japan. The United States imposed a special tax on some foreigners who win government procurement contracts.

This course is not surprising given the sluggish recovery. In Europe and the United States, the end of fiscal stimulus has left communities and industries foundering. And with the international solidarity sparked by the global financial crisis eroding, governments want to give domestic firms an advantage.

Since the financial crisis began in 2008, G20 countries have imposed 550 measures to restrict or potentially distort trade. Such measures disrupt international supply chains, reduce economic activity and dent the sense of common purpose that was needed to survive the economic crisis. Giving in to the protectionist impulse now can only make matters worse.

A version of this editorial appeared in print on June 8, 2011, on page A22 of the New York edition with the headline: Keeping Protectionism at Bay: Trade restrictions are exactly the wrong response to a sluggish global economy.

(a) Explain what dumping is. Why might charges of dumping or the initiation of an antidumping investigation be considered a protectionist trade measure.

(b) Describe four articles from the GATT that work to insure that WTO member states do not enact protectionist policies.