The Classical Model

The table below shows the number of workers needed to product one unit in the UK and France.

Wine Cheese France 1 4 UK 4 4

A. (2 point) Which country has an absolute advantage in the production of what good? Explain. B. (2 points) Which country has a comparative advantage in the production of what good? Explain.

We know that the UK is endowed with 240.000 units of labour in the agricultural sector and France with 280.000 units of labour.

C. (2 points) Draw the production possibility frontiers (PPF) for France and the UK. D. (2 points) What are the opportunity costs for Wine for France and the UK each in case of autarky? E. (2 points) What are the opportunity costs for Cheese for France and the UK each in case of autarky? F. (2 points) If France and the UK would start to trade, could a price of 2 (Cheese in terms of Wine) be the result? Why yes/no? G. (2 points) Who will like free trade between France and the UK and who will not? Explain carefully! H. (2 points) If these are the only two products that exist for the two countries, calculate the gains in GDP for the UK and France as a consequence of trading in Cheese and Wine (assuming an international equilibrium price of 1 cheese = 2 wine).

You know the UK is leaving the EU (Brexit). This affects the internationally competitive position of the UK. Assume that Brexit will lead to a long-term productivity loss of the UK of 50% in production for all products.

I. (2 point) Draw the table (as above) but with the new productivity numbers for the UK (hint: those of France do not change). J. (2 point) Which country has an absolute advantage in the production of what good? Explain. K. (2 point) Which country has a comparative advantage in the production of what good? Explain. L. (2 point) Add in the same graph (so do NOT draw a new graph!) under your answer of C the new PPF for the UK (with a dashed line in the same colour as the original UK PPF). M. (2 points) Does Brexit have an impact on UK GDP (welfare)? Provide some calculations (Hint: think of your answer to G. and what shift the PPF has made under K).
N. (2 points) Does Brexit have an impact on the exports to and imports from France? Explain your answers. O. (2 points) Looking at your answers to L. and M. what are the views of different actors regarding Brexit?

Exercise 2: Trade policy (20 points) Let’s look at the US and its computer production. NOTE: the US is a small country in the global computer market!

A. (4 point) Draw in a (p,q) figure a supply and demand curve for computers in US and show with point E0 (and related points P0 and Q0) the autarky equilibrium.

The US government decides to open up the computer market to international competition in to lower domestic prices for computers. B. (4 points) Draw in the figure you made under A. a horizontal line at price P1 where 0<P1<< P0, and explain what happens to: a. Computers production in the US; b. Total demand for computers in the US; c. Imports (or exports) of computers in the US; and d. Prices for computers in the US.

The US computer industry is crying foul and lobbies heavily in Washington DC to fight off foreign (unfair) competition from China. Trump is totally happy and gladly wants to put a tariff on computer imports; an ad valorem import tariff of size T, leading to a new price for computers.

C. (4 points) Draw in the figure you made under A. the new price line, and explain what happens to: a. Computer production in the US; b. Total demand for computers in the US; c. Imports (or exports) of computers in the US; and d. Prices for computers in the US.

D. (4 points) Do a welfare analysis of the US tariff. What happens to Consumer Surplus? Producer Surplus? Tariff revenue? Computer imports? And what is the TOTAL welfare effect of the tariff?

E. (4 points) Apart from the welfare effects under D. it is not possible for Trump to put tariffs on imports from Korea, for example, because of the Korea-US FTA. What would be the broader effects if he would do that?

F. (BONUS +2 points) Recall the discussion on ‘Open macroeconomy’ in the Economics course. From your analysis under D. it seems that putting a tariff on the import of computers helps to reduced imports. This works in partial equilibrium, but not in general equilibrium. What drives the trade balance more broadly?

Exercise 3: Non-tariff measures (10 points)

A. (1 point) What is the definition of a non-tariff measures (NTM)?

B. (2 points) Why are NTMs more important in a world of Trade 2.0 – with intraindustry trade and global production fragmentation compared to tariffs?

C. (3 points) Fill in the table. Behind each of the examples or concepts fill in (in column 2) whether it relates relatively more to Trade 1.0 or to Trade 2.0.

Examples/concepts Trade 1.0 or Trade 2.0 International production fragmentation Make it here, sell it there Tariffs Trade in intermediate products mainly, not in final products
Regulation of MNEs Fordism Non-tariff measures

D. (4 points) Fill in the table. Behind each of the examples or concepts fill in (in column 2) whether it relates more to NTMs or to tariffs.

Examples/concepts NTMs or tariffs/quotas A tariff-rate quota on banana imports from Colombia Secure trade systems that companies who want expedited access through customs should follow
SPS standards 25% on the import of Chinese computers to the US IMO 2020 sulphur regulations A tax on sweet soft drinks to reduce obesity