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Concordia

University
Department of Economics
ECON 319 - Sections A and B
Instructor: S. Elliston
Mid - Term Examination, October 2016

Answer ALL questions in the answer booklet provided. No notes allowed. Be as concise as
possible with your answers. You have an hour and a half to complete the exam.

Please use black or blue INK.


Question 1 [14 marks]
Use the information in the table on labour productivities in Canada and The United States to
answer questions the following questions.
Output per Hour Worked
Canada United States
Cheese 2 kilograms 1 kilogram
Cars 0.25 0.5

a. [1 mark] Explain which country has an absolute advantage in cheese.
b. [1 mark] Explain which country has an absolute advantage in cars.
c. [1 mark] What is opportunity cost of cheese in Canada?
d. [1 mark] What is the opportunity cost of cheese in the United States?
e. [1 mark] Which country has a comparative advantage in cheese? Briefly explain your
answer.
f. [1 mark] Which country has a comparative advantage in cars? Briefly explain your
answer.
g. [2 marks] What are the upper and lower bounds for the trade price of cheese?
h. [2 marks] Suppose Canada has 8 hours of labour available, draw Canadas PPF.
i. [1 mark] Suppose that Canada follows its comparative advantage in deciding where to
produce on its PPF. Label its production point.
j. [3 marks] If the trade price of cars is 5 kilograms of cheese per car, draw a consumption
possibilities line showing how Canada can gain from trade.


Question 2 [11 marks]

a. [5 marks] Using an example and a graph, illustrate how trade might hurt a country if it
imports goods that are produced under conditions of external economies of scale.
b. [6 marks] Explain the three key incentives for firms in a particular industry to cluster
together in a geographical region.


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Question 3 [25 marks]
In class we discussed the softwood lumber trade dispute between Canada and the United States
of America. Most forests in Canada are provincially owned and America claims that this amounts
to an export subsidy for Canadian softwood lumber exports to the U.S.
a. [3 marks] Briefly explain how an export subsidy on softwood lumber would affect the
Canadian (local) relative price of softwood lumber and hence local production of and
demand for softwood lumber.
b. [5 marks] Using a graph, illustrate and briefly explain how the response of Canadian
producers and consumers to the export subsidy from part (a) would affect the world
relative supply, world relative demand and hence the world relative price of softwood
lumber.
c. [1 mark] How does the change in the world relative price of softwood lumber from part
(b) affect Canadas terms of trade?
d. [1 mark] What is the effect of the change in Canadas terms of trade from part (c) on
Canadian welfare?
e. [1 mark] Given that the United States is an importer of softwood lumber, how does the
change in the world relative price of softwood lumber from part (b) affect the terms of
trade for the United States?
f. [2 marks] How does the change in the world relative price of softwood lumber from part
(b) affect American producers of softwood lumber?
g. [3 marks] Now suppose that the United States decides to impose a tariff on softwood
lumber imports from Canada in order to protect American producers of softwood
lumber. Briefly explain how the tariff on softwood lumber imports would affect the
American relative price of softwood lumber and hence American production of and
demand for softwood lumber.
h. [5 marks] Illustrate on a graph and briefly explain how your conclusion from part (g)
about the reaction of American consumers and producers to the import tariff would
affect the world relative supply, world relative demand and world relative price of
softwood lumber.
i. [1 mark] How does the change in the relative price of softwood lumber from part (h)
affect the American terms of trade?
j. [3 marks] Does the tariff on softwood lumber imports from Canada imposed by the
American government achieve the desired result of protecting American producers of
softwood lumber? Briefly explain your answer.


End of exam. Good Luck!

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