eco364april2021examsolutions

ECO364H5S page 3 of 4 Part B: Numerical Problems. 20 marks 1. Consider the Specific Factors Model. Let RS d , RS * and RS be the domestic, foreign and world relative supply curves. M is capital specific and F is land specific. The foreign economy is K abundant and the domestic economy T abundant. Let the curves be as follows: RS d : P d M P d F =600+0.8 Q r RS * : P * M P * F =800+0.8 Q r RD: P M P F =1200-0.3 Q r (5) a. Find equilibrium Q r . (5) b. Find equilibrium P M P F . solution: 1. a. 700 + 0 . 8 Q = 1200 - . 03 Q so Q = 454 . 5 b. P M P F = 700 + 0 . 8(454 . 5) = 1064 2. Consider the standard trade model with goods C and F . The PPC curve is given by 2 Q 2 F + 5 Q 2 C = 8. The utility of the agent is U ( q C , q F ) = q 1 2 F + q 1 2 C . Let p C = 2 and p F = 3. (5) a. Find the optimal consumption bundle ( q C , q F ). (5) b. Find whether trade occurs. a. Q F = 1 . 84 and Q C = 0 . 497 and q F = 0 . 87 and q C = 1 . 95 b. the economy imports C and exports F . Part C: Theoretical Problems. 65 marks. 1. In the Specific Factors Model RD-RS diagram analyze the effect of following shock on p M p F . The domestic economy is land abundant, the foreign economy capital abundant, F is the land specific good and M the capital specific good. Let M be manufactured goods and F food. (5) a. Pesticides used by domestic farmers depress land fertility. (5) b. For the shock in (a) explain the effect on world trade of M in a sentence.

solution: False. Econometric analysis of US employment after China re- ceived most favoured nation trading status suggests US employment initially rose across several industries but then started falling. the sectors included the automotive, communications and technology sectors. China may have imported US capital goods to retool its industries. after this was complete China’s penetration of US markets resulted in US employment losses. US firms could not compete with China’s low wages. also despite free trade agreements price discrimination across US export markets may exist. in eco- nomic models uniform prices is one benefit of free trade. thus it’s uncertain countries realized the full benefits of free trade. finally agricultural protec- tion appears strong despite the Uruguay Round Agreement, reflected by low estimates of US penetration of Japanese and Korean rice markets even with aid of government export programs. so free trade negotiations resulted in different benefits across countries. End of Exam