EC 407 Exam 1

EC407 Exam 1

1. (40 pts.) Define and briefly discuss the following:

a. Factor-price equalization theorem

b. Stolper-Samuelson theorem

' “ 2. (40 pts.) Discuss and graph the concept of immiserizing growth. Please state the two primary factors that contribute to the result of immiserizing growth.

3 (40 pts.) Assume the pre-tariff output is at point A Assume that domestic lobbying efforts have resulted in the government imposing a tariff on the import of food and as a result domestic food production changes to point B. Please distinguish between the outcome for a small country versus a large country (the large country is able to produce enough food to lower world food prices). Please state why the large country outcome may appear to be an argument for the imposition of protective tariffs. Can you attack this argument and make an argument against a large country imposing such a tariff?

4. (40 pts.) Assume that if the home country is not allowed to engage in international Trade, its consumption possibilities are restricted to points on its transformation schedule TT’; of these the best is shown by point E. The pretrade relative price of clothing that clears the local market is shown by the slope of line 1. Assume that with the opening of trade, world prices are reflected by the slope of line 2.

a. Graph and explain the position of the new production point for the home country after trade takes place.

b. Graph and explain the position of the new consumption point after trade takes place.

c. Graph and explain the trade triangle for the home country (your answer should state what the home country will be exporting and importing). Be sure to clearly label what the level of exports and imports will be.

d. Summarize your answer by stating why your analysis of this graph supports the idea that trade can be beneficial to trading nations. Be sure to state the pretrade requirement for mutually beneficial trade to occur.