Exam 2: Practice exam questions

    1. Please complete this practice exam on your own before class on Wednesday (Do not talk with anyone else about the exam.)
    2. Bring 2 copies of your answers to class on Wednesday, and give me one copy at the start of class.
    3. Beginning with classtime on Wednesday, you may discuss the exam with your classmates.
    4. You may not discuss this exam with anyone not enrolled in the class until after taking Exam 1.

1.	Suppose that the diagram to the right illustrates the situation of Argentina as a small-country importer of steel. Indicate in your blue book the change in Argentina's national welfare if it decides to increase its steel production to Q' using each of the following policy options:     (1) voluntary export restraint agreements with all of Argentina's foreign suppliers.     (2) tariffs on steel imports.     (3) a production subsidy for steel.

2.	Suppose you are hired as a trade policy consultant to President Clinton. Indicate and carefully support what policy recommendation, if any, you would make for each of the following (no graphs are necessary for full credit, just careful reasoning):
	a.	The Los Angeles Times recently reported that flat-panel display screens (used in products such as laptop computers, instrument panels of cars and aircraft, video telephones, high-definition TVs and hand-held personal communicators) are a "dual-use technology" product: "The screens are prominent features of laptop computers, but they are also being used increasingly in military equipment." Domestic production of flat-panel display screens therefore has likely benefits for U.S. national security purposes, but potential U.S. manufacturers cannot compete with lower-cost flat-panel display screens manufactured in Japan.
	b.	U.S. candle-making firms file a complaint about candles imported from China and manufactured with "cheap Chinese labor." Research indicates that candle-making workers are slightly more productive in the U.S. than in China, but, because of far lower wages in China, the cost of making candles is lower in China than in the U.S.
	c.	Without safeguards, when fishing companies catch tuna, they kill dolphins which swim with the tuna. To protect endangered dolphins, U.S. policy requires that tuna be caught with dolphin-safe procedures. U.S. tuna fishing companies file a complaint that tuna imported from Mexico is caught without using dolphin-safe procedures. Research indicates that the complaint is true.

3.	Suppose that Australia is a small country in each of the situations below. Consider each case separately, use a domestic market diagram for each one, and start out from a situation of free trade in each case. Be sure to illustrate in your diagrams the relevant gains or losses which result from the dumping in each case.
	a.	Australia imports apparel. Will Australia's welfare rise, fall, remain the same, or change in an uncertain direction if exporters begin dumping their output on the world market?
	b.	Australia exports wheat. Will Australia's welfare rise, fall, remain the same, or change in an uncertain direction if other exporters begin dumping their output on the world market (assume that Australia still finds it better to export wheat than to import it at the new global price)?
	c.	Australia initially exports iron ore. Will Australia's welfare rise, fall, remain the same, or change in an uncertain direction if other exporters begin dumping their output on the world market at a price low enough to turn Australia into an importer of iron ore?

4.	TRADE MISCONCEPTIONS: Explain how what we have covered during this part of the course relates to each of the following popular misconceptions about the consequences of trade and trade policy. You may use diagrams where you find them helpful, but you can earn full credit for your answers without diagrams, just a careful explanation.
	a.	Despite what the popular press sometimes reports, the economic theory of customs unions indicates that regional trade agreements such as Nafta do not necessarily raise a county's national welfare. Why are the effects uncertain?
	b.	Despite studies which consistently find that the U.S. as a whole and U.S. consumers in particular lose welfare as a result of trade protection, opinion surveys often indicate that most Americans favor increased protection. How does the public choice theory of protection help account for this?
	c.	The trade policy game we played in class illustrates how a willingness to resort to trade market intervention can actually promote freer trade between countries. What is the reasoning behind this apparent contradiction?

5.	Methods used by traders to evade U.S. tariffs include the following:
		Importable item  Evasive maneuver Frozen concentrated orange juice (FCOJ)  Mixing FCOJ with water just offshore Sugar  Shipping pancake mix and extracting the sugar after entry Trucks  Installing a back seat to get the vehicle defined as a car
	Through "smuggling" maneuvers like these, traders avoid paying tariffs, but they also incur additional costs. Assume that the extra cost is some constant amount in each case (for example, $200 per imported truck). Suppose also that the U.S. is a small-country importer of items like the ones listed above. Does circumvention of tariffs make U.S. welfare rise, fall, remain unchanged or change in an uncertain direction? Use a domestic market supply and demand diagram to support your answer. (Hint: recall the results of customs union theory.)