ECON355 Introduction to International Trade

Winter Term 2, 2025

Generated Practice Questions for Finals

1. Multi-good Ricardian Model with Transport Costs: There are two countries:
England (E) and France (F). There are two goods: Umbrellas (U) and Wine (W).
Labour is the only factor of production. The follow information is known about
the production of each good in each country:

Unit labour requirement, aLi

Industry
U W
England 1 1
2 5

France 1 2
3

a. The size of the labour force in England is 𝐿𝐸 = 500. Show the Production
Possibilities Fronter for England. (Place U on the horizontal axis). Indicate
values associated with the horizontal and vertical intercepts and the
slope of the PPFE.
b. The size of the labour force in France is 𝐿𝐹 = 800. Show the graph of the
World Relative Supply of Umbrellas. Indicate values associated with
horizontal and vertical segments of the RS graph.
c. When there is free trade between England and France, each country
specialises in the production of a single good. In a single figure, show a
Relative Demand for English Labour curve and the Relative Supply of
English Labour that is consistent with this information. Indicate all known
values along the horizontal and vertical axes.
Two new goods are introduced into the world: Vitamins (V) and Yo-Yos (Y).
Information regarding all 4 goods is provided in the following table.

Unit labour requirement, aLi

Industry
U V W Y
England 1 3 1 2
2 5 5

France 1 3 2 1
3 10
𝑤𝐸 4
In free trade equilibrium, the relative wage (England relative to France) is 𝑤𝐹 = 5.
 d. Determine which goods are associated with each country (the pattern of
specialisation) if there are no additional costs associated with moving
goods between countries.
e. Determine which goods are produced by each country if there are
additional costs associated with moving goods between countries. The
transport costs, 𝑧, is a percentage of the cost of production of a good,
where 𝑧 = 40%. This applies to goods exported from England to France
and from goods exported from France to England.
2. Analysis of Welfare in Small Country with Trade Policies: The demand for coffee
is 𝑞 𝐷 = 24 − 𝑝 and the supply is 𝑞 𝑆 = 𝑝 in the Home country.
a. Calculate the equilibrium price and quantity of coffee in the Home
country in autarky.
b. Home now imports coffee. Home is a small country in its imports of
coffee and faces an export supply of 𝑝 𝑋𝑆∗ = 6.
i. Calculate the quantity of coffee traded in the world market.
ii. How much of the Home country’s consumption is from domestic
production, and how much is imported?
iii. Calculate the consumer surplus, producer surplus and total
surplus in free trade.
c. Suppose that Home imposes an import tariff of $x, which reduces but
does not restrict all trade.
i. Calculate, in terms of x, the change in consumer surplus, producer
surplus, government expenditure and total surplus as compared to
free trade.
ii. Illustrate your answer to (c)(i) using a graph of Home’s supply and
demand, and of the trade market.
iii. Given that this tariff either increases or decreases the surplus in
50
the Home country by − % compared to the free trade scenario,
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find the value of x.
d. Instead of an import tariff, suppose that home now imposes an import
quota of q. This quota reduces the quantity of coffee traded to the same
amount as the tariff in (c). Assume that the quota rents are earned in the
Home country.
i. Find the value of q.
ii. Calculate the quota rents collected by firms in the Home country.
iii. Calculate the change in consumer surplus, producer surplus, and
total surplus in the Home country.
e. Compare the change in total surplus for the import tariff in (c) and import
quota in (d).
 f. The government in the Home country instead decides to impose an
import rate quota, with an in-quota tariff rate of $1, an over-quota tariff of
$4, and a quota level of 8. Assume that quota rents are earned in the
Home country.
i. Calculate the equilibrium price and quantity traded with the tariff
rate quota, and the quantity demanded and supplied in the Home
country.
ii. Calculate the quota rents collected by firms in the Home country.
iii. Calculate the government revenue collected by the tariff rate
quota.
iv. Illustrate your answers in (e)(ii) and (e)(iii) using a graph of the trade
market.
v. Calculate the change in consumer surplus, producer surplus and
total surplus.
3. Export Policy for Large Country: The Home country is a large country in its
exports of vaccines to the Foreign country. Vaccines generate a positive external
benefit per unit of vaccine consumed.
a. Using a graph of the market for vaccines at home, show how the total
surplus in the Home country changes when it moves from autarky to free
trade. In your graph, include the social marginal benefit curve.
b. Suppose that the Home country imposes a subsidy on the export of
vaccines. Using another graph of the market for vaccines at home, show
how the imposition of the export subsidy changes the total surplus in the
Home country. In your graph, include the social marginal benefit curve.
c. How might the total surplus in the Home country be different if a
production subsidy of the same value as imposed, instead of an export
subsidy as in (b)?
4. Monopoly, Free Trade and Dumping: The demand for a good in the Home country
is 𝑞 𝐷 = 800 − 20𝑝. The market at Home is controlled by a monopolist with
1
increasing marginal costs 𝑚𝑐 = 16 𝑞. The monopolist can export to Foreign as
well. The demand in Foreign is perfectly price inelastic at 𝑝∗ = $20.
a. If the monopolist chooses not to export to Foreign (only sells inside
Home), determine the monopoly quantity and price. What is the marginal
revenue on the last unit produced and sold by the monopolist?
b. If the monopolist decides to export and sell into Foreign, what is the
marginal revenue from units sold into Foreign?
c. The monopolist will maximize profits by choosing quantities to sell at
Home and to export so 𝑀𝑅 𝐻 = 𝑀𝑅 ∗ = 𝑀𝐶. Determine the quantity sold
into each market (Home and Foreign) and the price of the good at Home.
 d. Illustrate your answers on a labelled graph of the Home country’s costs
and revenue.
e. Could Foreign claim that Home is dumping the product into the Foreign
market?
5. Game Theory and Trade Agreements: Home and Foreign are two countries
engaging in free trade. Each country may decide whether to impose an import
tariff. The decisions of both countries result in differing outcomes for total
surpluses for the countries, forming a ‘game’.
a. With the aid of relevant graphs and a payoff matrix, explain how the Nash
equilibrium is one where both countries apply a tariff. Explain how the
payoff structure resembles that of a ‘Prisoner’s Dilemma’.
b. With reference to your answer in (a), explain the relevance of trade
agreements such as the General Agreement on Tariffs and Trade (GATT).
c. Outline the main provisions of the GATT.
6. Trade Creation and Diversion: The demand for shoes is 𝑞 𝐷 = 48 − 𝑝 and the
supply is 𝑞 𝑆 = 𝑝 in Albania. Suppose that Albania imports shoes from Brazil and
Canada and is a small country in its import of shoes. The free trade supply prices
of shoes from Brazil and Canada are $𝑥 and $y respectively. Albania imposes a
specific tariff of $12 on imports from both Brazil and Canada.
a. Calculate the equilibrium price and quantity of shoes in Albania in
autarky.
b. Suppose that 𝑦 = 8 and 8 < 𝑥 < 20. Albania enters a free trade
agreement with Brazil and no longer imposes a tariff on imports from
Brazil.
i. Explain how the pattern of trade for Albania changes from entering
the free trade agreement.
ii. Illustrate, on a graph of the shoe market in Albania, the area
representing the improvement in consumer and producer surplus,
and the area representing the lost tariff revenue from entering the
free trade agreement, each where applicable.
iii. Find, in terms of 𝑥, the change in consumer surplus, producer
surplus, government revenue and total surplus because of the free
trade agreement.
iv. Describe the relationship between the free trade supply price in
Brazil and the effect of the free trade agreement in Albania.
v. Find the value of 𝑥 such that the free trade agreement is neither
harmful nor beneficial to Albania (i.e. results in no change to total
surplus to Albania).
c. Suppose instead that 𝑦 = 16. Again, Albania enters a free trade
agreement with Brazil and no longer imposes a tariff on imports from
Brazil.
 i. Given that 𝑥 > 12, explain how the pattern of trade of Albania
changes from entering the free trade agreement.
ii. Illustrate, on a graph of the shoe market in Albania, the area
representing the improvement in consumer surplus, and the area
representing the lost tariff revenue from entering the free trade
agreement, each where applicable.
iii. Find, in terms of x, the change in total surplus because of the free
trade agreement.
iv. Describe the relationship between the free trade supply price in
Brazil and the effect of the free trade agreement in Albania for 𝑥 >
12.
d. With reference to your answers in (b) and (c), and using ideas of trade
diversion and trade creation, explain whether a free trade agreement
always beneficial to participating countries.