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ID: 1191449 • Letter: H
Question
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1) Suppose Albania experienced economic growth, and is now represented by the rightmost production possibility frontier in the figure above. If its point of production with trade was point c before the growth happened, would you consider this growth to be export-biased or import biased? If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania's terms of trade?
2) Assume Norway and Sweden trade with each other, with Norway exporting fish to Sweden, and Sweden exporting Volvos (cars) to Norway. Illustrate the gains from trade between Norway and Sweden using the standard trade model, assuming first that tastes for the goods are the same in both countries, but the production possibility frontiers are different since Norway has a long coast that borders on the north Atlantic, which makes it easier to catch fish, and Sweden has greater endowment in capital, making it relatively more productive in automobiles
3) Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Analyze the impact on Japan’s terms of trade (increase, decrease, or no change) of the following events:
a. A war in Middle East disrupts oil supply.
b. Korea develops the ability to produce automobiles that it can sell in Canada and the USA.
c. A harvest failure in Russia
d. A reduction in Japan’s tariffs on imported beef and fruit.
4) For each of the following examples, explain whether it is a case of external or internal economies of scale.
a. A number of firms doing contract research for the drug industry are concentrated in southeastern South Carolina.
b. All Hondas produced in the United States come from a few plants in Ohio, Indiana, or Alabama.
c. All airframes for Airbus, Europe’s only producer of large aircraft, are assembled at a factory in Toulouse, France.
d. Cranbury, New Jersey, is the artificial flavor capital of the United States, consisting of many firms.
Explanation / Answer
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