study guide exam 2 by zhangyun

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									                                 Econ. 474/575 Exam #2
                                      Study Guide

Midterm format
The content of the exam comes primarily from class lecture. Also, the discussion topics
and readings are fair game, particularly the study questions from each chapter that I have
put on my webpage.

The midterm will be comprised of the following types of questions
      a. 30% short answer (approximately 2 or 3 questions worth 10 points each) I
          will give you a concept and you will define it and explain its relevance to
          Latin America
      b. 20% essay (one essay worth 20 points). The essay will focus on the broader
          issues and lessons learned from the Latin American experience. Case studies,
          chapter questions, and applications of economic theory to a new country are
          all possible topics.
      c. 50% technical questions based on the economic theory or models and their
          application to Latin America.

You will have 2 hours to take the exam. There is a class after ours, so papers will be
collected promptly at the end of the hour. Please bring a watch and time yourselves
according to the number of points. You have roughly 100 minutes to complete the exam,
so if a question is worth 10 points, don’t spend more than 10 minutes on it.

General information
      Trade integration
      Drug war in Latin America
      informal sector: definition, how it is changing, relative size

Concepts and definitions
      Levels of economic integration: know definition of EACH and example
      Advantages and disadvantages of trade blocks
      Trade creation
      Trade diversion
      Insights from trade theory
      Benefits of intraregional trade in Latin America
      Trends in 21st century
      Trade triangle: rum
      Bacardi history and importance of move to U.S.
      Functioning intraregional trade blocks in Latin America
              DR-CAFTA, CAN, MERCOSUR, NAFTA, CARICOM
      Effects of NAFTA in Mexico, U.S.
      Informal sector
              costs of being informal
              costs of being formal
              why informal sector is characterized by low productivity
Case studies
       Puerto Rican trade integration
       Puerto Rican rum industry
       Impact of drug war in Colombia, Mexico, Caribbean
       Informal sector in Peru

Economic models
     Model of trade creation
     Model of trade diversion
     Consumer and producer surplus calculation and definition
     Effectiveness of U.S. drug interventions based on S & D analysis
     Three tier analysis of informal sector


                          Sample problem on Trade Diversion

Consider the domestic price of t-shirts in these countries:
      China:    $3
      Mexico: $4
      U.S.:     $7
      Canada: $8

What would be the net effect of the creation of NAFTA (free trade among Mexico, US,
and Canada) on the U.S. market compared to the pre-NAFTA policy of $2 tariff on all
imported t-shirts?

1. Pre-NAFTA
    a. Which country do we import t-shirts from?
    b. What is the price of t-shirts in the U.S.?
    c. How much is produced?
                 Domestically?
                 Imported?
    d. Show regions of CS, PS, and G Revenue

2. NAFTA
    a. Which country do we import t-shirts from?
    b. What is the price of t-shirts in the U.S.?
    c. How much is produced?
                 Domestically?
                 Imported?
    d. Show regions of CS, PS, and G Revenue
    e. Show regions of net gain and net loss compared to the pre-NAFTA scenario

3. Cheap Chinese t-shirt scenario
       Suppose that t-shirts can be produced for $1.50 in China. What would happen to
your answer in part 2 (under NAFTA)?
                                      SOLUTION


1. Pre-NAFTA
NOTE: I only drew the price lines that are relevant to the US. We are not interested
in Canadian and Mexican t-shirts because they are more expensive. We are
interested in buying Chinese t-shirts, but must add the $2 tariff.
    a. Which country do we import t-shirts from? China
    b. What is the price of t-shirts in the U.S.? $5
    c. How much is produced? Qc = total quantity produced
                  Domestically? Qb
                  Imported? Qc-Qb = imports
    d. Show regions of CS, PS, and G Revenue
                  CS: triangle with vertical lines
                  PS: triangle with diagonal lines
                  G Rev: rectangle labeled GOV
    NOTE: In order to calculate these areas, you would need to be given the exact
    quantities and know where the Supply and Demand curves intersect the axis. You
    would calculate the area of a triangle as ½*(Base*Height) and the area or a rectangle
    as (Length*Width). In this example, you can just shade them in.



                                                                             SUS




          $7

                                                              Schina + t
          $5
                                      GOV                                  Schina
          $3

                                                                                    DUS

                                Qb                     Qc                      t-shirts
                                          imports
2. NAFTA
    a. Which country do we import t-shirts from? Mexico
    b. What is the price of t-shirts in the U.S.? $4
    c. How much is produced? Qd = total quantity produced
                   Domestically? Qa
                   Imported? Qd-Qa = imports
    d. Show regions of CS, PS, and G Revenue
                   CS: triangle with vertical lines
                   PS: triangle with diagonal lines
                   G Rev: NONE since there is no tariff with Mexico
     e. Gains and losses compared to pre-NAFTA
                   Gains: the two little triangles in black were not in the last graph and
now they represent CS
                   Loss: the highlighted rectangle is a net loss because we have lost the
Gov. revenue from the tariff with China in the last graph. We don’t lose the top section
of the rectangle because it is now CS and is shaded in so we are just trading the pre-
NAFTA Gov. Rev. for new CS. But the bottom part of the rectangle is now a net loss.
                   Net Effect: if the loss > the gain, then you have a net loss. This is what
is called TRADE DIVERSION through economic integration.



                                                                              SUS




           $7

                                                                 SChina + t
           $5
                                                                          SMex
           $4
           $3                           Loss in G                            SChina

                                                                                    DUS

                               Qa Qb                       Qc    Qd           t-shirts


                                            imports
3. Cheap Chinese t-shirts
    a. Which country do we import t-shirts from? China
    b. What is the price of t-shirts in the U.S.? $3.50
    c. How much is produced? Qtotal = total quantity produced
                   Domestically? Qdom
                   Imported? Qtotal-Qdom = imports
    d. Show regions of CS, PS, and G Revenue
                   CS: triangle with vertical lines
                   PS: triangle with diagonal lines
                   G Rev: rectangle labeled GOV
    Under NAFTA, we would still have this same outcome. We would not be interested
    in importing t-shirts duty free from Mexico because they would still be more
    expensive ($4) compared to the Chinese t-shirts. So sometimes, trade integration has
    NO EFFECT!!!!



                                                                           SUS




          $7


                                                              SChina + t

                                                                        SMex
          $3.50
                                                                           SChina
                                          GOV
          $1.50
                                                                                 DUS

                             Qdom                              Qtotal      t-shirts
                                          imports

								
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