ECON 3110H – INTERNATIONAL TRADE

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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