Econ 323 Take-home Midterm Exam
Instructor: Jiatong Zhong
Due 9:00 AM, October 10, 2020
You can use textbook and lecture notes during the exam. You are not allowed to communicate with anyone about the content of the exam.
1. (15 points) (a) (3 points) Explain what is the “gravity model” in trade. List all patterns described in the gravity model.
(b) (6 points) Use the spreadsheet provided on eClass. Support each pattern you list above with data in the spreadsheet. You must choose the right countries to illustrate your pattern.
(c) (6 points) Can the the Ricardian model or the Heckscher-Ohlin model explain the gravity pattern? Why if your answer is yes, and why not if your answer is no?
2. (25 points) Consider a country that produces two goods: camera and shirts. The country is a small open economythat is, it trades with the rest of the world at fixed prices. Suppose an economist observes at some point that, given the factor prices, camera producers use 10 units of capital and 4 units of labor to produce one camera; and shirt producers use 5 units of capital and 5 units of labor to produce one shirt. Both factors are mobile between industries. Standard Heckscher-Ohlin assumptions hold.
(a) (3 points) Which product is capital-intensive? Why?
(b) (10 points) Suppose the country is capital-abundant. How would the capital-labor ratio in camera and shirt sector change when the country moves from no-trade equilibrium to free trade equilibrium? How about relative wage? Illustrate in the following diagram. Please also explain your notations. Hint: According to the Heckscher-Ohlin theorem, when the country is capital-abundant, which good will they export? Which industry will expand?
(c) (12 points) Suppose capital owners in this country decide to invest in an emerging economy. As a result, capital flows out of this country. What happens to the level of labor employment in the shirts sector in the long run? Illustrate with a box diagram.
3. (60 points) Short Essay Please type your essay in Word or other word processors, in 12 pt, single-space. I encourage you to run your essay through Grammarly before submission. See eClass for instructions to access the department license.
Read the following two quotes from New York Times about the recent U.S.-China trade deal. Comment.
“A ceremony at the White House can’t hide the stark truth about the ”phase one” China trade deal: The deal does absolutely nothing to curtail China’s subsidies to its manufacturers. All those “forgotten men and women” in U.S. factories have, once again, been forgotten.”
“It’s ironic that the trade war, by heightening Chinese fears of being isolated from tech supply chains, has accelerated their drive to be self-sufficient. The means by which they accomplish tech transfer and acquisition may change as a result of today’s agreement, but their desire for it will not.”
• Please support your arguments with facts, theory, or data (or a combination of them). Hint: It will help if you can first research and state what the current phase of the trade negotiation entails and what the previous negotiations have achieved.
• Please give credits to your sources and explicitly cite them. Otherwise you might run the risk of plagiarism!
• Your essay will be graded based on substance (e.g. how well your theory (and data, if you use any) supports your arguments) and clarity of exposition, not your stance on the issue.