INTERNATIONAL TRADE

Problem set Instructions:
The final problem set is a combination of multiple choice and short answer questions.
There are two sections. The first section asks you to answer multiple choice questions and to explain your answers briefly. The second section asks you to provide short-answers to case-study based questions.

SECTION A
Answer each question and explain as per the instructions at the bottom of each question.

QUESTION A.1
In free trade a country will not trade if
A. Autarky prices and free trade prices are the same.
B. Autarky prices are larger than free trade prices.
C. Autarky prices are smaller than free trade prices.
D. The absolute value of autarky prices are negatively correlated with free trade prices.
(1 mark)
Explain your answer in up to 200 words and using a diagram
(4 marks)

QUESTION A.2
The reason why the most efficient firms in a Melitz industry make greater profits under free trade is due to the fact that they
A. Operate under increasing marginal costs.
B. Operate under FDI.
C. Operate under low transport costs.
D. Operate under increasing returns to scale.
(1 mark)
Explain your answer in up to 200 words and using a diagram
(4 marks)

QUESTION A.3
In the Pure Specific Factors model with two sectors, Cars (C) and Wheat (W), Capital (K) is specific to C and Land (A) is specific to W. If the government imposes a tariff on the imports of W then
A. Both owners of K and owners of A will benefit.
B. Owners of A will benefit.
C. Owners of K will benefit.
D. Neither owners of K nor owners of A will benefit.
(1 mark)
Explain your answer in up to 200 words and using a diagram
(4 marks)

QUESTION A.4
In a Mixed Specific Factors model with two sectors, Cars (C) and Wheat (W), Capital (K) is specific to C and Land (A) is specific to W. If the government imposes a tariff on the imports of W then
A. Both owners of K and owners of A will benefit.
B. Owners of A will benefit.
C. Owners of K will benefit.
D. Neither owners of K nor owners of A will benefit.
(1 mark)
Explain your answer in up to 200 words and using a diagram
(4 marks)

QUESTION A.5
A country imposing a tariff can benefit in terms of social welfare if
A. The terms-of-trade benefit exceeds the sum of production and consumption distortion loss.
B. The tariff revenue exceeds the sum of production and consumption distortion loss.
C. The consumer surplus loss is less than the producer surplus gain.
D. The terms-of-trade benefit exceeds the consumer surplus loss.
(1 mark)
Explain your answer in up to 200 words and using a diagram
(4 marks)

SECTION B
Short answer questions. Answer each in up to 200 words.

Background
Imagine that you work for the World Bank and you have been called to Ghana to aid the new president to come up with a new international trade strategy.
You are told that the new government is interested in moving away from agriculture and into manufacturing. To do so, the government wants to pursuit a policy of import substitution industrialization (ISI).
You are given a brief about Ghana highlighting the following points:
• About half of Ghana’s population depends on agriculture, but Ghana still imports some of its food.
• The majority of Ghana’s people live in rural areas and exist on a subsistence way of life.
• Ghana has one of the highest rates of income inequality in the world.
• Nearly half of the population is employed in agriculture.

QUESTION B.1
Ghana imports and exports food from and to neighbouring Côte d’Ivoire. The latter nation is very similar to Ghana in most ways. It has a similar environment, a similar level of education, and similar institutional background. Would you argue that trade between the two countries can be explained by comparative advantage? Why or why not?
Ghana also exports food to Switzerland. The latter nation is very different to Ghana in most ways. Would you argue that trade between the two countries can be explained by comparative advantage? Why or why not?
(5 marks)

QUESTION B.2
Explain import substitution industrialisation and how it can affect Ghana. What role does learning by doing play and when does it make sense for the government to interfere?
(5 marks)

QUESTION B.3
Ghana’s president’s ISI strategy is to ask Switzerland to adopt a voluntary export restraint (VER). He believes that this is likely to increase Ghanaian welfare. Using two diagrams (one for each country) explain the Ghanaian welfare consequences of this policy.
(5 marks)

QUESTION B.4
Explain if the VER is likely to improve the average efficiency of Ghana’s farms?
(5 marks)

QUESTION B.5
After a meeting with Ghana’s president you learn that the government is also interested in repatriating migrants that went to European countries to study engineering a decade ago. Explain how this is likely to change Ghana’s comparative advantage.
(5 marks)

Sample Solution

ACED ESSAYS