178.312: Globalisation and Trade
Assignment 1
(Due on 7 April)
Instructions: This assignment consists of numerical and/ or short descriptive questions. These would require short answers. There are three (3) questions of equal value. Please answer all three questions. Marks obtained in the assignment will depend on the quality of your answer. A maximum combined page limit of 6 pages, including diagrams, applies to your submission. Ideally, answers would be shorter in length than this maximum.
Question 1 (30 marks)
The maximum amount of steel or aluminium that Canada and France can produce if they use all the factors of production at their disposal with the latest technology available to them is shown below:
Canada France
Steel(tons) 1000 3000
Aluminium (Tons) 2400 1000
Assume that production occurs at constant-cost conditions.
a) According to the principle of comparative advantage theory, should the two nations specialize? Will the extent of specialization be partial or complete? [10 marks]
b) Within what limits do the terms of the trade (TOT) lie if the specialisation occurs? [10 marks]
c) Describe the trade triangle for France and Canada and show which country will benefit if TOT moves in any direction. [10 marks]
Question 2 (30 marks)
a) In a growing market (i.e., increasing demand), why is an import tariff a less restrictive trade barrier than an equivalent import quota? [15 marks]
b) What would be the primary motivation for commodity-exporting developing nations to form a cartel? Why do cartels typically fail? [15 marks]
Question 3 (30 marks)
Assume the United States is a large consumer of steel, able to influence the world price. DUS and SUS denote its demand and supply schedules in Figure 1. The overall (United States plus world) supply schedule of steel is denoted by SUS.+W.
Figure 1 Import Tariff Levied by a Large Country
Answer all questions (a-f) by referring to Figure 1 above.
a) Calculate the free trade market equilibrium price, domestic consumption, and volume of steel imports by the US. [5 marks]
b) Suppose the United States imposes a tariff (t) of $100 on each ton of steel imported. With the tariff, calculate the price of steel and the volume of steel imports by the US. [5 marks]
c) Of the $100 tariff, how much is passed on to the US consumer via a higher price, and how much is borne by the foreign exporter? [5 marks]
d) Calculate the tariff's deadweight welfare loss to the United States totals [5 marks]
e) Calculate the tariff's terms-of-trade effect equals. [5 marks]
f) Did the tariff change the overall welfare of the United States? By how much? [5 marks]