Question DEPARTMENT OF ECONOMICS ECON 3110H – INTERNATIONAL TRADE

03 Jun Question DEPARTMENT OF ECONOMICS ECON 3110H – INTERNATIONAL TRADE

Question
DEPARTMENT OF ECONOMICS

ECON 3110H – INTERNATIONAL TRADE

Final Exam December 17, 2013

Time: 2 hours

Instructions: Answer any four (4) of the following six questions. Each question answered is

worth 25%. Where questions have several parts, the value of each part is listed.

Use diagrams where appropriate, and be sure to label and discuss your diagrams.

Unexplained and poorly-labeled diagrams will not receive high marks.

1. China is one of the largest foreign markets for U.S.-grown pecans. China does not grow any

pecans; they are native to North America. This year due to bad weather, the pecan harvest

was smaller than usual. As a consequence pecan prices increased by about 50%.

(a) Illustrate the effect of the poor pecan harvest on the increase in pecan prices both in the

U.S. and in China. [40%]

(b) One possible policy response to the rise in pecan prices would be the imposition by the

U.S. government of an voluntary export restraint on pecans. Illustrate the results of this

policy both in the U.S. and in China using a diagram, and show the resulting welfare

effects. Who gains and who loses by this policy? [40%]

(c) The WTO prohibits voluntary export restraints. What do you expect the consequences

of the price rise to be in the short term? in the longer term? [20%]

2. The use of subsidies are commonplace in agriculture in the U.S. and the E.U.

(a) Using a well-labeled diagram, illustrate the impact of the use of an export subsidy on an

agricultural product market by a large economy like the U.S. Note the welfare effects

and indicate who gains and who loses. [50%]

(b) If agriculture was liberalized and subsidies to agriculture were removed

(i) Would world welfare rise or fall? Why or why not? [10%]

(ii) A group of agricultural exporting nations—The Cairns Group—which includes

Australia, Brazil, Canada, Indonesia, Thailand are pushing for the removal of subsidies

in agriculture. Explain in terms of the welfare effects of the subsidies why

they take this position. [20%]

(iii) Would all individuals gain by the removal of agricultural subsidies in the U.S. and

E.U.? Would all countries gain? Why or why not? [20%]

3. Tariffs are commonly used; export taxes are somewhat less common

(a) For a large country, identify the welfare effects of a tariff. You must use a wellexplained,

labeled diagram.[40%]

(b) For a large country, identify the welfare effects of an export tax. You must use a wellexplained,

labeled diagram.[40%]

(c) Provide at least three examples of cases where an export tax would be used, and explain

why. [20%]ECON 3110H – FINAL EXAM

4. In the past, countries tended to apply tariffs to protect domestic import-competing sectors.

(a) Explain why a small country might apply welfare-reducing tariffs in the past. [33.3%]

(b) Explain why the establishment of bilateral and multilateral negotiations moved these

same small countries to pursue trade liberalization and lower tariffs. [33.3%]

(c) Discuss three aspects of the WTO that make it relevant to the establishment of the

current liberal trading regime. [33.3%]

5. Answer both parts below:

(a) Under the WTO, countries may not discriminate based on the production and process

methods used.

(i) Explain the significance of this restriction. [25%]

(ii) Explain when exceptions to this restriction are possible. [25%]

(b) 200 years ago there were no high-wage and low-wage countries, and per capita GDPs

were more or less similar around the world.

(i) Can the growth of trade over the last 200 years explain the divergence in average

wages and in per capita GDPs among countries of the world? [25%]

(ii) What are the future prospects for the influence of trade on per capita GDP differences

and for wage differences? [25%]

6. (a) Are preferential trade arrangements (PTA’s) welfare improving or welfare reducing,

both for the countries within the arrangement and for those outside? You should incorporate

diagrams in your answer. [60%]

(b) Describe how PTA’s are managed within the WTO, and explain how the presence of

the WTO restricts the trade policy options available for members of PTA’s. [40%]

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