Class 18March 29

Last class: 3. International trade theory

Quiz 5

Today: Result of Quiz 5Result of Problem set 2

4. Trade policies of importing nationsReview for the midterm exam

Next class:Midterm exam (9:20am – 10:50pm)

Reading: 3. International trade, comparative advantage

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Class 18 March 29

7

Important date:Midterm exam (chapters 1 – 3), Tuesday, April 39:20am – 10:50am

Result of Quiz 5 N = 35 Range = 6.5 – 10 Average = 8.72

1. Absolute advantage vs. comparative advantage

2. Two statements

3. Productivity data of two nations and two products (a) Absolute advantage

(b) Comparative advantage

(c) Should they trade?

(d) How to draw a PPF?

4. Production cost data of two nations and two products (a) Absolute advantage

(b) Comparative advantage

(c ) Should they trade?

Result of Problem set 2 N = 36 Range = 41 – 99.5 Average = 86.6

4. Trade policies of importing countries4. Trade policies of importing countries

4.1. Major types of import barriers

4.2. Reasons for import barriers

4.3. Effects of specific import policies

4.4. Related issues

3.7. Exchange rate and its determination 3.7.1. Exchange rate: the ratio at which two

currencies are traded (the price of one currency in terms of another)

e.g., 1 US dollar = 1.56 Canadian dollars

1 US dollar = 7.90 Chinese yuans

3.7.2. Importance of exchange rate in trade

3.7.3. History of money (currency)

4.1. Major types of import barriers

(a) Import tax (tariff)

-- Fixed amount per unit (e.g., $0.5 per unit)

-- A percentage of the price (e.g., 5%)

-- A combination of the two

(b) Import quota

-- Quota on total import

-- A quota on a country basis

(c) Tariff rate-quota: a combination of tariff & quota

e.g., First 200 mmt, 2% tariff

201 -- 500 mmt, 4%

Above 500 mmt, 6%

4.1. Major types of import barriers

(d) Other import restrictions

-- State trading (e.g., China’s grain import)

-- Technical restrictions

(e.g., high quality standards)

4.2. Major reasons for import barriers

(a) Redistribution of welfare

(b) National security

(c) Protest new industries

(d) Protect producers and farmers

(e) Other reasons (e.g.,health, public safety, etc.)

4.3. Effects of specific import policies (a) Small vs. large importer

(b) A graphic analysis-- A small importer

-- A large importer

(c) A mathematical analysis-- A small importer

Qd = 20 - 1 P Qs = -1 + 2 P

ED = Qd - Qs = 21 - 3P

ES faced by the importer: Pw = 5

Price after trade = Quantity of import =

Change in CS = Change in PS = Gains from trade =

4.3. Effects of specific import policies (c) A mathematical analysis

-- A large importer

Qd = 20 - 1 P Qs = -1 + 2 P

ED = 21 - 3P

ES faced by the importer: ES = -1.5 + 2 P

Price after trade =

Quantity of import =

Change in CS =

Change in PS =

Gains from trade = change in (CS+PS) =

4.3. Effects of specific import policies (d) Impacts of an import tax: a small importer

Qd = 20 - 1 P Qs = -1 + 2 P

ES faced by the importer: Pw = 5---------------------------------------------------------------------------------------------------

Import P* Qs Qd CS PS Tax CS+PS+Tax

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No trade 0 7 13 13 84.5 42.25 0 126.75

Free trade w/ no transp. cost 6 5 9 15 112.25 20.25 0 132.50

An import tax of $1 per unit 3 6 11 14 98 30.25 3 131.25

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3. International trade theory 3. International trade theory 3.1. Simple examples: two-person cases

3.2. Absolute and comparative advantages

3.3. Trade between two countries

3.4. The sources of comparative advantage

3.5. Other explanations for international trade

3.6. Measurement of the gains from trade

3.7. Exchange rate and its determination

Midterm exam

1. What will be covered in the exam?

2. What will be the format?

3. What are the study materials and practice problems?

4. What do you need to bring to the exam?

5. Suggestions

Midterm exam

1. What will be covered in the exam?

-- Chapter 1 -- Chapter 3

-- Approximate distribution:Chapter 1 15 - 20%Chapter 2 35 - 40%Chapter 3 35 - 40%

Midterm exam

2. What will be the format?

-- Multiple-choice questions (about 25-30 points) (e.g., interpretation of GNP) -- Short-answer questions (25-30 points)

-- Problems (about 25 - 35 points) (e.g., calculate equilibrium price and quantity)

-- Graphical analysis (about 15 - 25 points) (e.g., draw a graph and calculate CS and PS)

Midterm exam

3. What are the study materials and practice problems?

Quiz 1 to Quiz 5 Class exercises

Take-home exercisesClass examples

Lecture notes (class 01 -- class 18)Problem sets

Reading for chapters 1, 2 and 3

Midterm exam

4. What do you need to bring to the exam?

-- Your calculator

-- A ruler will be helpful

-- No formula sheet is needed

Midterm exam

5. Suggestions

a. Go over each quiz and make sure you understand and know how to answer each question in each quiz

b. Go over each class exercise and take-home exercise and make sure you understand and know how to

answer every question

c. Go over the lecture notes, especially for the classes you missed

d. Go over your problem sets and Chapters 1-3 readings

e. Study hard and feel confident!