Recall that Y = C + I + G + X

University of Washington Geography 349 Autumn 2004

FIRST IN-CLASS TEST

Name:___________________________________ Student number:____________

Write your name and student number above. Then answer each question below, in the spaces provided. The possible points total 47; your points will be multiplied by 0.49 to yield your score out of possible 23. You have 110 minutes.

1. [11 points] Briefly define each term below, sufficiently to distinguish it from the other terms.

Common market

Countervailing duty

Customs union

Discriminatory procurement

Dumping

Free trade area

MFN provisions

Quota

Subsidy

Tariff

World Trade Organization

SHORT ANSWERS (not complete sentences)

2. [4 points] The basic, neoclassical theory of trade (based on comparative advantage) is normative (based on an assumption of a single overarching goal) and deductive (derived logically from a set of basic assumptions, rather than from generalizing from observations). What is the single overarching goal, and what are three of the basic assumptions?

3. [8 points]

Recall that Y = C + I + G + X – M. Y is national income, also called GDP (gross domestic product). What does each letter on the right stand for?

Why does it make sense to subtract M from the other things on the right side?

We can define country’s annual savings (S) as Y – C – G. What does this definition mean in everyday language?

Note the following transformation:

Since	*Y =*	*C + I + G + X – M*
and	*S =*	Y	*– C – G*	then
	*S =*	*(C + I + G + X – M)*	*– C – G.*
If you do the subtraction on the right side,	*S =*	*I + X – M.*
If we subtract I from both sides, then	*S – I =*	*X – M.*

Even if you didn’t follow that algebra, you should be able to describe S – I = X – M in everyday language. In other words, what basic, key relationship does this express: a relationship that I’ve mentioned almost every day we’ve met since September 30^th?

ESSAYS

4. [5 points] In what products does Canada have a comparative advantage, with respect to the US? On what basis do you conclude that – in other words, what information led you to that conclusion, and why? Explain why you would say that this comparative advantage is natural or acquired, or both. How would you relate this comparative advantage to the theory of factor proportions?

5. [5 points] Recall the equation G₁ = (a₁/b₂) (C₂/C₁) – a₁/b₁. If G₁ is Canada’s gain from exporting the product of its comparative advantage (a₁) to the US, use each of the three ratios to suggest, in principle, how Canada might maximize its gain from trade. Briefly suggest one fairly realistic policy measure the government might undertake toward this goal, given Canada’s actual comparative advantage.

6. [6 points] Briefly present the four components of Porter’s “diamond” of factors that influence in which sectors[1] a country’s firms tend to be internationally competitive. Then use two or more of these components to suggest two ways in which Canada might increase the competitiveness of one of the key export sectors you’ve mentioned in (4) and (5).

7. [8 points] Write an essay about two policy arguments and counter-arguments about trade: in each case, trace the arguments against trade liberalization and the counter-arguments), then note where you stand (perhaps qualifying your stance -- most of us are not for or against international trade in every single incidence, but may have more concerns about the conduct of trade in certain sectors, with certain countries....). Since the basic, neoclassical theory of trade suggests that free movement of goods and services is always a benefit to the system, explain what assumptions of the theory are not being met, if in one or both cases you have concerns about trade liberalization.

[1] “Sector” is the same as “industry,” which could mean extractive, agricultural, or service industries as well as manufacturing.