International Economics

Question 1

Consider production and trade between Canada and Thailand, both producing timber and clothes using labor and capital. We are dealing with industries with increasing costs of production, technology is assumed to be the same across both economies. Tastes for timber and clothes are identical in both economies. Assume that Canada is relatively abundant in capital compared to Thailand. Consider industry X (clothes) is labor intensive and industry Y (timber) is capital intensive. Draw the production possibility frontiers, and indifference curves for Canada and Thailand, and then use them to illustrate and explain the movement from the autarky equilibrium to the free-trade equilibrium pattern of price ratios, production, consumption, trade and the gains from trade for the two countries.

( maximum 800 words)

Question 2

Answer all parts

Assume that Sweden is a small country in terms of the world market for steel.

How would a Swedish import tariff on steel affect Sweden’s welfare? Explain your answer using a supply/demand diagram, clearly marking the effect of the tariff on Sweden’s steel imports, consumer and producer surplus, and government revenue.

Use your diagram in part (a) above to identify and explain the deadweight loss of the tariff.

Assume that there is an increase in Sweden’s demand for steel. Would the domestic price of steel increase by the same amount if steel imports were restricted through either tariffs or quotas? Illustrate your answer using two separate open-economy supply/demand diagrams.

(maximum 800 words)



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