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(ECON335)Sample Midterm.pdf
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Econ 335 (Fall 2008) 1-1 G. Facchini
Sample midterm exam
You have 1 hours and 50 minutes to answer the following questions
1. The Ricardian model Consider two countries, Portugal and the United Kingdom and two goods, clothing and wine. In the UK the number of work-ing hours needed to produce one unit of clothing and one liter of wine are respectively equal to 4 and 4. In Portugal the number of working hours nec-essary to produce one unit of clothing and one liter of wine are instead equal to 2 and 1. The labor supply in the UK is equal to 100 units, whereas in Portugal it is equal to 40 units. Please answer the following questions:
(a)
In which good does the UK have a comparative advantage?
(b)
Graphically show the production possibility frontier for Portugal and the UK. Which prices prevail in autarky in Portugal and the UK? Why?
(c)
Derive the world relative supply of the two goods, assuming that the world consists only of Portugal and the UK.
(d)
Assume that the world relative demand for the two goods takes the following form: (Demand for wine/demand for clothing) = (Price of clothing/Price of wine). Plot the world relative demand curve together with the world relative supply. Calculate the free trade equilibrium relative price of clothing.
(e)
Describe the pattern of trade between the two countries.
2. The speci.c factors model The Netherlands produce .owers (F ) and ap-pliances (A) according to the following production functions: F = F (T,L), A = A(K, L) where T is land, K is capital and L is labor.
(a)
The Dutch government has decided to build a large dam on the Ijsslemer with the purpose of increasing the land that can be used for agricultural purposes. Using the diagram we have developed in class, show what are the e.ects of the Dutch government intervention on the production of .owers and appliances. What are the e.ects of this policy on the income distribution in the Netherlands?
(b)
Assume now that the Netherlands has a comparative advantage in the production of .owers, while appliances are imported from abroad. The countrys government, worried that the countrys economy might rely excessively on the conditions prevailing in the world .ower market, has
Econ 335 (Fall 2008) 1-2 G. Facchini
decided to introduce a tari. on the imports of appliances. What are the income distribution e.ects of this policy?
(c) As an alternative to the previous policy, the Dutch government is consid-ering the possibility of introducing a subsidy on the exports of .owers. What are the income distribution e.ects of this new policy?
3. The HeckscherCOhlin model
.
What are the four main theorems of the Heckscher Ohlin model? Provide a precise statement of the theorems and a proof of the results.
.
Are the predictions of the HeckscherCOhlin theorem supported by the empirical evidence?
4. The Rybczynski theorem. Consider the HeckscherCOhlin with two goods (bier and stee