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October 22, 2007



Could you re-post your syllabus or list the texts where students could get the basics to answer these questions.

I could pass this test (I think!) but many of us in public policy schools are always looking for relatively non-technical sources to teach this stuff to future policy makers rather than future economists.

KY Choong

A wonderful set of questions, looking for second best answers.

The good thing about second best answers is that there are lots of them. Presumably the examiner will reward a decent attempt to argue a point of view, even if that view is inconsistent with the examiner's view.

Questions looking for "first best" answers, on the other hand, seem less tolerant of any attempt to argue a different point of view (i.e., other than the first best solution).


I like these types of questions. I can answer seven of them! Can u pls post samples of your student's answers? I could be asking for a cumbersome stuff, but if this is not possible, can u pls post your response, in general, to your student's answers? I'm curious to know how your students answer these fantastic, reality-based questions.

cameron Mulder

Okay every day i read your Blog.

It makes me want to take your classes more and more.

Any chance as a loyal blog reader, and radiohead experiment winner! you could put in a good word for me? :)


It would be interesting to see how much variance on these questions you could get out of a random sampling of academic economists diverging in sub-specialty, age, educational background, research orientation, ideology, national origin, etc.


Hey, why not answer them all together?

Let's have some first guesses:

1. How about country size, location, neighbours, preferences, comparative advantage (-> world demand)?

2. Hmm.. sounds self-evident ;)

3. Using the data below, and some “reasonable” elasticities, provide your best guess as to the real income gain that would accrue to each country if their tariffs were eliminated altogether. Interpret your results.

3. phuu... no "reasonable" guess, no textbook..

4. True - what about endowment?

5. Don't agree: Prices (wages) matter at the margin..

6. .. no good guess overhere..

7. False - the tariffs creates revenue for the country...

8. True - if China suddenly stops digging out coal and starts importing oil this may hur everyone else (who imports that stuff). Only a country with autarky can not be hurt by anybody elses trade policy.

(.. and I didn't prepare for it, so don't be so harsh! ;)

any comments?


one question for U




I am currently half way through an International Economics class for grad school. My prof. is giving six quizzes with one final.

I just wanted to compliment you on the clarity and fairness of your questions.


For #4, if the production functions are the same (which is highlighted in the technology statement, I think), with the same preference, both would produce the same basket of goods; no reason to trade and thus, no gain from trade.

Is that right?



Well, as said above I don't think so - because of endowment.

Imagine two otherwise identical countries, one endowed with oil the other one not - it *would* make sense to trade (if oil is a valueable good.. ) - the same applys to any differences in endowment.

If the countries are, however, *absolutely* identical you are right: .. no gains from trade.


scale effects


Also, there is also the question of human capital stocks which is not clear. If a country has more human capital than the other, even with the same technologies, one country should specialize in knowledge intensive industries and the other in other industries. This is also an "endowment" difference, but not in the physical sense as pointed out by MK.


For #6,the conclusion clearly does not follow from the premise. Even with a very restricted view (not taking into account spillovers and other thing like that), subsidising low TFP industries might be optimal if the increase in TFP per dollar of subsidy is larger than for high TFP industries. It's like saying that China development policy is failing because they are still poor. This is a static analysis - what's important is the dynamic effect in "are they getting richer", not "are they currently poor".




. Time is a bird for ever on the wing.


1. Countries will have different levels of openness despite both following free trade policies for many reasons.
Tariffs are not the only cost to trade. If the country lacks ports it will be less open. If its legislation is not clear or consistent, there is higher risk for traders and investors. If the country has very strong comparative advantages it may trade more due to increased gains from specialisation than a country with diverse endowments and weak comparative advantages. "Behind the border effects" have become the frontier for trade economists precisely for these reasons.

2. The difference between autarky and world relative prices should capture most of the gains from trade for a small country, although a 'large' country moving from autarky to open economy could further lower world prices increasing the gains from trade beyond that difference.

3. This needs maths, and I'm sitting in a Beijing cafe and not in the mood for the intellectual rigor required. Sorry.

4. Others have done a good job on this question. Different endowments (including human and social capital) will always result in different production functions which necessarily result in potential gains from trade. Specialisation and scale effects also apply.

5. The economist misses the point of effects at the margin. If domestic factor prices were significantly different from world prices, the country would soon find trade increasing quickly. Even small trade exposure would influence factor prices, although high trade costs could limit this to an extent.

The industrial subsidies in Korea generated significant TFP gains themselves, thus increasing the countries development. Korea may have been better off if it more closely followed its own comparative advantage, rather than trying to force a change in comparative advantage, but its industrial policies have clearly been very beneficial to its development. I suspect it wasn't too far removed from its real comparative advantage if we consider more than just 2 factors of production (particularly if we consider education).

7. Import tariffs impose a dead weight loss, so reducing tariffs has a higher impact on the countries real income than reducing transport costs. It also has a different distributional effect, with more of the gains going to consumers and less going to government (due to decreased tariff revenue).

8. If another country liberalises trade, it may cause adjustment pressure in my country. Adjustments always carry a cost in the short term, so I may be worse off in the short term. This is usually expressed most accutely in the job market due to increased lay offs while now uncompetative industries close and job demand moves to new areas. In the long term I would expect the benefit to be positive.

Don't know how my answers fair compared to your students or to your answers. I just finished my masters in a similar course to what you offer, but in Australia.
I wonder if any of your blog readers agree/disagree with my responses.

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