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Midterm 1999
International Trade and Development
1. Has the trend toward globalization had a positive impact on world welfare? Explain in detail how world
welfare has been affected. Have multinational corporations hindered or helped world welfare and how and
what evidence can be offered? Has multilateral aid and bilateral aid by developed countries been helpful and
what evidence can be offered? (20)
2. Has Clinton’s policy of trade engagement with China achieved desirable results? From both China’s and
the United States’ perspectives, review the current state of trade negotiations that involve the United States and
China. What economic and political factors must be taken into account? (20)
Do either question 3 or 4, but not both.
3. Examine the current currency and financial crises adversely affecting some countries in South America.
Which countries are having problems? What problems do they face? What are the proposed solutions? What
caused the problems in the first place? (20)
4. Record the following transactions according to BOP into the following accounts: current, nonofficial capital
account, official capital account. (20)
a. The United States’ Treasury pays a $5 million interest payment to a Japanese resident.
b. The Central Bank of Japan sells $4 million of U.S. dollars in the open market.
c. The U.S. government gives Ethiopia $7 million worth of wheat.
d. Sony of Japan pays a $3 million dividend to a U.S. resident.
e. A Toyota firm located in the U.S. sells $8 million of cars to Japan.
f. A Toyota firm located in the U.S. sells $12 million of cars to a dealer in the U.S.
g. A U.S. resident buys $1 million of stock from a Russia company.
h. CMU receives a donation of $2 million from an alumnus in Germany.
i. A U.S. resident buys $6 million of Canadian real estate.
j. The Exchange Stabilization Fund and NY Fed buy $9 million of pounds in the open market.
k. Based on the above transactions, what is the BOP and balance on the investment income account?
5. Examine the partial equilibrium effects of a tariff placed on imported silk from China. Describe the effects
and show graphically how these effects are represented. You should include in your discussion the impact on
consumer surplus, producer surplus, tariff revenue, dead weight loss, net welfare, imports, the dollar value of
imports, domestic production, and domestic consumption. (20)
6. Assume we have a two nation (CMU and SVC) and a two good (X and Y) world. CMU and SVC both have
linear production possibility frontiers. For CMU: Y = 8 - X and for SVC: Y = 6 - .5X. Use one graph .
a. Graph both countries' PPFs (put X on the horizontal axis and show the intercepts on the graph). (2)
b. What numerically is CMU’s and SVC’s DTOT? What commodity is the DTOT in terms of? (2)
c. Assume both CMU and SVC have identical tastes and that the social indifference curves are well-behaved.
Adding only one indifference curve to the graph, show the autarky production and consumption points (assume
both X and Y are consumed). What is the rule to maximize social welfare? (3)
d. Now assume we have free trade between CMU and SVC.
i.. The WTOT will be somewhere between what numerical values? (1)
ii. Adding only one WTOT line and one more indifference curve in your graph, show the free trade
consumption and production points for CMU and SVC. What is the WTOT equal to? (3)
iii. Expressed in terms of the marginals, what is the rule to maximize social welfare? (2)
iv. For this problem, what is the rule to maximize the value of production? (2)
v. Show the amount of export and import for CMU and SVC. (2)
vi. Numerically, how much is exported and imported. (2)
vii. Show the trade triangles for CMU and SVC? (2)
e. Draw a new graph for CMU’s PPF (Y = 8 - X). Show the gains from exchange and specialization. (4)