Major Economics Questions - Essay Example

Page 31 8. a. P = 0.5 + 35Q Q = (0.5 + 67)/35 Q 93 billion barrels per year produced domestically P = 291 – 40Q Q = (291 – 67)/40 Q = 5.6 billion barrels per year consumed 8.b If US stops all imports of oil, then demand price is equal to the supply price of oil in order to achieve market equilibrium, such that: P = 291 – 40Q = 0.5 + 35Q Q = 3.87 billion barrels are needed to produce when no imports P = 291 – 40(3.87) = $136 per barrel when no imports 8.c. Domestic producers will gain because they will produce more oil at a higher market selling price while consumers will lose because they will be required to pay a higher oil price Page 32 11.a. Peq = 700 – 2Qeq = 40 + (Qeq/5) Qeq = 264 Peq = 172 11.b. QD = 350 – (120/2) = 290 QS = -200 + (5*120) = 400 11.c. The Belgian consumer surplus will increase if the nation can trade freely because the demand will increase when the price lowers to 120; on the other hand, the Belgian producer surplus will be reduced because domestic supply will decrease due to lower market price. However, at a free trade scenario, the producer surplus will equal to the consumer surplus such that there will be zero national gains or losses. Page 47 7.a. Pugelovia have no absolute advantage in producing both rice and cloth. 7.b. Pugelovia has a comparative advantage in producing 1 unit of rice while no comparative advantage in producing 1 unit of cloth. 7.c. The Pugelovian price ratio between rice and cloth without international trade is 75:100 or 3:4. 7.d. With international trade, the equilibrium international price will be limited between the two initial price ratios in Pugelovia and the rest of the world due to converging price ratios. Pugelovia will export rice and import cloth. Page 66 7.a. 7.b. 7.c. Page 89 7.a. 100 = 60w + 40r 100 = 75w + 25r Where w = (100 – 25r)/75 such that 100 = 60[(100 – 25r)/75] + 40r 100 = 80 – 20r + 40r r = 1 w = (100 – 25*1)/75 = 1 7.b. 100 = 60[(120 – 25r)/75] + 40r 100 = 96 – 20r + 40r r = 0.2 w = (120 – 25*0.2)/75 = 1.533 7.c. 7.d. Page 118 9.a. Products Japan Exports Japan Imports Total Trade Net Trade IIT IIT Share Weighted IIT Share ($ millions) ($ millions) ($ millions) ($ millions) ($ millions) (percentage) (percentage) Perfumes 2 242 244 -240 4 1.6% 0.0% Cosmetics 641 801 1442 -160 1282 88.9% 0.9% Household clothes washing machine 23 461 484 -438 46 9.5% 0.0% Digital integrated circuits 21711 16875 38586 4836 33750 87.5% 23.1% Automobiles 94274 7638 101912 86636 15276 15.0% 10.5% Large civilian aircrafts 0 3080 3080 -3080 0 0.0% 0.0% Photographic cameras 54 80 134 -26 108 80.6% 0.1% Total 145882 Total 34.6% 9.b. The weighted IIT share for the seven products for 2006 of Japan is 34.6%. Thus, US has relatively more IIT share than Japan. 9.c. Page 139 9.a. The shape of the curve would be a steeper slope and the position would shift higher on the machinery. 9.b. An increase in endowment of capital would result in a production-possibility curve that is biased toward machinery or production of large volume of machinery. The large volume of machinery produced is due to the effect of more clothing being given up in order to produce machineries. 9.c. The US willingness to trade will increase. 9.d. As US output of machineries increase, the international equilibrium machinery/clothing ratio would fall. 9.e. US national well being may decline as a result of the increase in endowment of capital. As the capital/labour ratio in the international sector declines, the wages in the US would decrease causing a declining income for workers. 10.a. The long-term drought would increase the willingness to trade of East Asia that would trigger US to export more food. 10.b. The large demand for food in East Asia would increase the international prices for food and the equilibrium internal food/clothing ratio would increase. 10.c. 10.d. Food producers will gain real income while the clothing industry will lose real income. 11.a. The US production-possibility curve will shift with bias on the clothing industry. 11.b. The US willingness to trade will decline. 11.c. The equilibrium international price of clothing will fall. 12.a. 12.b. Page 162 3. A tariff would increase the production output domestically. When a country imposes tariff, the domestic price of the product would increase in order to include the tariff. Local producers who do not pay the import tariff would have an incentive to increase their output in order to exploit the higher domestic price. The tariff would give domestic producers extra surplus on all the goods they would have produced even without the tariff plus smaller net gains on additional sales. Graphically, the domestic supply would increase from point J to point C, when tariff is imposed. The production effect is the area ABCJ. The production effect is computed by { = [q1*t] + [(q2 – q1)*t/2]] 4. A tariff would decrease the consumption domestically. When a country imposes tariff, the domestic price would increase such that consumer demand will decline due to higher price. The tariff costs consumers both the full tariff on every goods they continue to buy and the net enjoyment on goods they would have bought at the lower tariff-free price but do not buy at the higher price that includes the tariff. Graphically, the domestic demand would decrease along the demand curve from point H to point F, when tariff is imposed. The consumption effect is the area ABFH. The consumption effect is computed by { = [q3*t] + (q4 – q3)*t/2] 5.a. Consumer’s gain = [20*0.02] + [(22 – 20)*0.02/2] = 0.42 billion dollars 5.b. Producer’s loss = [6*0.02] + [(8 – 6)*0.02/2] = 0.14 billion dollars 5.c. Tariff revenue loss = (20 – 8)*0.02 = 0.24 billion dollars 5.d. Net Effect = [(22 – 20)*0.02/2] + [(8 – 6)*0.02/2] = 0.04 billion dollars 6. 7.a. Consumer’s gain = [100,000*100] + [(105,000 – 100,000)*100/2] = 10,250,000 7.b. Producer’s loss = [35,000*100] + [40,000 – 35,000)*100/2] = 3,750,000 7.c. Tariff revenue loss = (100,000 – 40,000)*100 = 6,000,000 7.d. Net Effect = [(105,000 – 100,000)*100/2] + [40,000 – 35,000)*100/2] = 500,000 8. 9. No Tariff Domestic Market Tariff Price of Clothing 1.00 1.25 25% Price of Cotton Yarn 0.30 0.35 16.7% Price of Other Fibre 0.30 0.30 Value Added 0.40 0.60 ERP 50% Page 195 5. Imposing a tariff high enough to cut bulldozer imports by 60 percent would increase the domestic price of bulldozers but would eventually generate revenues for the US government on the taxes levied, thus it is less damaging to them. A VER arrangement to cut exports by 60 percent would also increase the domestic price of bulldozers in the US but would decrease the quantity imported such that foreign bulldozer would incur losses due to reduced sales. However, they would gain additional profits from quota rights which are equivalent to the tariff revenues of the US government if they impose an import tax. An implication of the large windfall profit for foreign producers is that the competitive position of US producers may not have improved much as a result of the VER because foreign producers have no reason to compete against each other to try to win a bigger share of the restricted US market. 6.a. The representative of the US government can argue that the new import regulation would create a fair competition between domestic and foreign producers such that the amounts of technology and human resources invested from both producers are equivalent. Also, the government standards about workers safety and product quality are established in order to protect both the workers and the consumers, thus, foreign producers must comply with government regulations as much as domestic producers. 6.b. The representative of foreign apple growers can argue that the trade policy is unfair trade restriction because the new import regulation is biased to US domestic producers who gains the competitive advantage. As a result, the trade restriction would reduce the importation of apples in the US but the domestic production would increase in order to satisfy the demand. The new import regulation can be considered as a non-tariff barrier where foreign producers will lose but domestic producers will gain. 7.a. Producers gain = (120*0.02) + (160 – 120)*0.02/2 = 2.80 7.b. Consumers gain = (400*0.02) + (420 – 400)*0.02/2 = 8.20 7.c. Government gain = 240*0.02 = 4.80 7.d. net loss/gain = 0.40 + 0.20 = 0.60 8 9 10 Section 301 is a provision of the US trade law which allows retaliation against the exports of countries maintaining what the US views as unfair trade practices such as dumping, countervailing duty and allowing the theft of US intellectual property by local firms. 11 Page 257 3. Bigg Redd, Inc. (Canada) is dumping beverage in the US market. Banzai Brewery (Japan) and Tippie Laurie, Ltd. (UK) are not dumping beverages. Bigg Redd is dumping beverage because the average cost is the same to the price when delivered to the US port. 5. The world welfare will increase. The US will not gain from the export subsidy and import tariff. Canada, on the other hand, will gain from the combination. In a perfectly competitive market, the US export subsidy will lower the price of jeans in the world market. However, the import tariff would increase the price of imported jeans in Canada. Thus, US have no gain. Canada will gain because of import tax revenues as well as a lower world market price. Page 377 5. Industries such as pharmaceuticals and electronic products attract more FDI because both are capital intensive industries as well as labor intensive. A multinational company would invest on countries with lower labor wages and foreign currency exchange. 6. P&G lending $2 million to a firm in Japan is considered as FDI. 7.a. Increase the price to $20 would maximize global profit because it would cover the exact increase in cost but not affect the demand. 7.b. The Irish government would concur with the transfer pricing but the Japanese would be against it. 8. Labor groups seek restriction on the flow of direct investments out of the country because they will be greatly affected due to slow growth in the domestic industry and no creation of jobs will happen. It is not just the group’s own interest they are after but the interest of the nation as well. Investments would also help the national economy in providing more business as well as capital invested. 9. The report will focus on the positive effects of capital investments into the country. The growth of the industry will be the center of the report as well as the employment that it would create. Also, allowing FDI into the country would generate revenues for the government while increasing the national welfare. 10. In 1930, the country was experiencing recession wherein employment was high and inflation skyrocketed. These two reasons created a slowdown in immigration. 11.a. Inflation is higher in the South than in the North. 11.b. Unemployment rate is higher in the South. 11.c. Higher unemployment in the South but employment demand is high in the North causing migration. Read More