Part II – Analytical Questions (55 points)
1. What are the three major flows/volumes that economists study? (2 points)
2. In the gravity equation, what are the two most important determinants that affect (one postively and one
negatively) trade flows. (2 points)
3. Why does the US trade more with Mexico than Vietnam? What does the US trade more with Germany than
Iceland? (2 points)
4. What are the BIG Three international institutions? Which one is the most recently established? (2 points)
5. Explain why the MFN tariff rate is usually the upper bound of the actually applied tariff schedules. (4 points)
6. State two main empirical facts about the world trade. (2 points)
1
7. If you are asked to estimate the impact of the Trump tariffs on imports from China using the gravity equation. What would be the left-hand-side variable? (2 points) And what would you include on the right-hand-side
variable? (3 points) Give your predictions on the sign of the coefficient for each variable included on the righthand-side. (positive? negative? or zero?) (3 points)
2
Ricardian Model
Suppose US (N) and Mexico (S) both can produce soccer balls (SB) and footballs (FB). The unit labor requirements for soccer balls and footballs in the US and Mexico are:
a
N
SB = 10; a
N
FB = 2; a
S
SB = 10; a
S
FB = 10
• Which country has the absolute advantage in producing football? Which country has the comparative advantage in producing football? (2 points)
• Us the law of Comparative Advantage to predict the Trade Patterns between US and Mexico. (2 points)
• Suppose the US has 100 workers. Draw the PPF for US. (label the slope and intercepts) (Use the quanity of
Football as the X-axis) (4 points)
• What’s the autarkic relative price p
N
FB
p
N
SB
in the US? What’s the autarkic relative price p
S
FB
p
S
SB
in Mexico? Please give
your reasons. (4 points)
• After trade, if the world relative price pW
FB
pW
SB
= 1, which product the US decides to produce? Why? Show full
derivation in algebra. (4 points)
3
• Draw and show the gains from trade for the US using the PPF/CPF graph again. (Use the quanity of Football
as the X-axis, draw and label PPF, before and after budget constraints, indifference curves, imports and exports) (5
points)
• After trade, if the US relaxed the immigration policy which increased its population to 150 workers. Which
product the US decides to produce then? Does the new immigration policy affect the comparative advantage
of the US? Please explain. (4 points)
• If the world relative price pW
FB
pW
SB
= 1, would Mexico be better off, worse off, or no change, compared with
autarky. Why? (4 points)
4
HO model
• Explain the major differences between the Ricardian model and the HO model. (2 points)
• What are the two relative terms in the HO model to show the comparative advantage between economies?
(2 points)
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