1. According to the Specific Factors Trade Theory

IR 213: Professor Graham Homework 2 Due September 27, 2017 at the beginning of class.

1. According to the specific factors trade theory: a. Both owners of factors specific to export industries and owners of factors specific to import-competing industries gain from trade b. Both owners of factors specific to export industries and owners of factors specific to import-competing industries suffer from trade c. Owners of factors specific to export industries suffer from trade, while owners of factors specific to import-competing industries gain d. Owners of factors specific to export industries gain from trade, while owners of factors specific to import-competing industries suffer

2. Bangladesh is labor-abundant and capital scare. Clothing requires labor, but very little capital, to produce. a. Without trade, would the price of clothing in Bangladesh be higher or lower than the world price? b. If trade in clothing became more free, what would happen to the price of clothes in Bangladesh? c. If trade in clothing became more free, what would happen to the wages of workers in clothing factories? 4. Denmark is capital abundant and land scarce. Cattle farming requires a lot of land and relatively little capital.

3. Assume that Country A, in the absence of trade, finds itself relatively abundant in land and relatively scarce in labor. The factor endowment theory reasons that with free trade, the internal distribution of national income in Country A will change in favor of: a. Both owners of labor and owners of land b. Neither owners of labor nor owners of land c. Owners of Labor d. Owners of Land

4. Of the following groups, who benefits from the US lowering tariffs on sugar, and who is harmed? a. US producers of sugar (i.e. sugar farm owners and workers) b. US consumers (i.e. people who buy products made from sugar) b. Foreign producers of sugar

5. A lot of steel is produced in the state of Pennsylvania. If we consider the impact on both consumers and producers, then protection of the steel industry is: a. In the interest of the United States as a whole, but not in the interest of the state of Pennsylvania b. In the interest of the United States as a whole and in the interest of the state of Pennsylvania c. Not in the interest of the United States as a whole, but it might be in the interest of the state of Pennsylvania d. Not in the interest of the United States as a whole, nor in the interest of the state of Pennsylvania 6. The principal benefit of tariff protection goes to: a. Domestic consumers of the good produced b. Domestic producers of the good produced c. Foreign producers of the good produced d. Foreign consumers of the good produced

7. If Canada imposes a tariff on bananas and if none are grown in Canada, this tariff has a. Only revenue effects b. Only protective effects. c. Both protective and revenue effects. d. Neither revenue nor protective effects. Figure 5.1 illustrates the demand and supply schedules for pocket calculators in Mexico, a “small” nation that is unable to affect the world price. Answer the next 13 questions on the basis of this figure.

Figure 5.1. Import Tariff Levied by a “Small” Country

8. In the absence of trade, Mexico produces and consumes how many calculators? 9. In the absence of trade, Mexico’s producer surplus and consumer surplus respectively equal: a. $120, $240 b. $180, $180 c. $180, $320 d. $240, $240 10. With free trade, Mexico imports how many calculators? And what is the total value of Mexico’s imports? 12. With free trade, Mexico’s producer surplus and consumer surplus respectively equal: a. $5, $605 b. $25, $380 c. $45, $250 d. $85, $195 13. Consider Figure 5.1. With a per-unit tariff of $3, the quantity of imports decreases to: a. 20 calculators b. 40 calculators c. 50 calculators d. 70 calculators 14. According to Figure 5.1, the loss in Mexican consumer surplus due to the tariff equals: a. $225 b. $265 c. $285 d. $325 15. According to Figure 5.1, the tariff results in the Mexican government collecting: a. $100 b. $120 c. $140 d. $160 16. According to Figure 5.1, Mexican manufacturers gain ______because of the tariff. a. $75 b. $85 c. $95 d. $105 17. According to Figure 5.1, the deadweight cost of the tariff totals: a. $60 b. $70 c. $80 d. $90 18. Consider Figure 5.1. The tariff would be prohibitive (i.e., eliminate imports) if it equaled: a. $2 b. $3 c. $4 d. $5

19. Imagine Mexico put a quota in place instead of a tariff. a. How many calculators would be produced in Mexico? b. If Mexico limited calculator imports to 40 per year, what would the price be? c. Is this more or less than the number that would be produced domestically in the absence of a quota (i.e. with totally free trade)?

20. Imagine that there was no tariff and no quota, but there was a subsidy for domestic calculator producers in Mexico – the government pays a $3 to Mexican firms for each calculator produced. How many more calculators do Mexican firms make with the subsidy than they would produce without the subsidy? What is the change in price that consumers pay for calculators?