final exam

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DEFERRED FINAL ASSESSMENT FOR

ECON1086 INTERNATIONAL TRADE

This assessment has a total of 50 marks. There are four questions in the

following four pages (including this page). Answer all four questions

and follow the instructions carefully. Explain your answers concisely

and in a clear way. You can write your answers using a new word

document. If you are asked to draw a figure or provide a mathematical

expression, you may write it down on a paper by hand, take a photo of it,

convert it to pdf and attach to the main document containing your answers.

Question 1 (16 marks)

Consider two countries, Home and Foreign and a single good, X. Assume that Home country

imports good X from Foreign country. Let MD represent the import demand curve in Home

country and EX represent the export supply curve in Foreign country. In addition, let PX denote

the price of good X. Assume that the import demand curve for good X in Home country is

given by:

MD = 80 – 2PX,

and assume also that the export supply curve for good X in Foreign country is given by:

EX = PX – 10.

REQUIRED. Answer parts from (a) to (d) based on the above information.

(a) What is the free trade price of good X? (4 marks)

(b) Under free trade, how many units of good X is imported by Home country? (4 marks)

(c) If Home country imposes a specific tariff of $12 per unit of good X imported, what will

be the domestic price of good X that Home consumers pay? (4 marks)

(d) Assume that instead of a specific tariff, an import quota will be used on good X. What

is the amount of the quota that will have identical effects as the specific tariff of

$12? (4 marks)

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Question 2 (12 marks)

Consider the Grossman-Rossi Hansberg model of offshoring. There are two goods: X and Y.

Good X requires 4 units of unskilled labour to do Task 1 and 4 additional units of unskilled

labour to do Task 2. Further, 2 units skilled labour is also necessary to organize production of

Good X. Good Y requires 2 units of unskilled labour to do Task 1 and 2 additional units of

unskilled labour to do Task 2. Besides, 4 units skilled labour is also necessary to organize

production of Good Y. The prices of both goods are fixed on world markets at $24 per unit.

Initially, all tasks were performed domestically, but later on it becomes possible to perform

Task 1 in another country (offshoring) for free.

REQUIRED. Answer parts from (a) to (b) based on the above information.

(a) What is the wage of skilled and unskilled workers before offshoring? (6 marks)

(b) What is the wage of skilled and unskilled workers after offshoring? (6 marks)

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Question 3 (12 marks)

The manufacturing of electric generators (E) takes 3 units of capital (K) and 3 units of labour

(L). The manufacturing of footwear (F) takes 2 unit of K and 4 units of L. If the total supply of

capital (K) in this economy is 160 units and the full-employment output of footwear, QF, is 20

units, then:

REQUIRED. Answer parts from (a) to (b) based on the above information.

(a) What is the full-employment output of electric generator, QE? (6 marks)

(b) What is the total supply of labour (L) in this economy that is consistent with the full-

employment outputs of each good? (6 marks)

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Question 4 (10 marks)

Assume that there are two firms producing Wine in Turkey. While one of these firms is a local

firm (from Turkey), the other is a New Zealand firm. These firms have identical marginal costs

and compete in Bertrand fashion, i.e., choosing prices. Turkish government is considering

imposing a tariff on Wine imports. From a social welfare point of view in Turkey, would you

recommend this tariff? Explain your answer in no more than 500 words.