(30 points) Country H, which is small, exports good X. Its excess supply curve is given by P=100 4X. The world price ratio Px/Py is P=200. It is suggested, but not required, that you use a graph to help answer the questions below. (Note that answers may be fractions of a unit.)
Find the free trade equilibrium quantity of exports.
What is the producer surplus in this equilibrium?
Country H elects to offer a 25% subsidy to exports of X. What is the equilibrium quantity of exports with this subsidy?
What is the producer surplus after the subsidy?
What is the government expenditure on the subsidy?
What is H’s deadweight loss due to the subsidy?
(30 points) Country H, which is large, exports good X. Its excess supply curve is given by P=100 4X. The world’s excess demand curve for X is 600-2X. It is suggested, but not required, that you use a graph to help answer the questions below. (Note that answers may be fractions of a unit.)
Find the free trade equilibrium quantity and price of exports.
What is the producer surplus in this equilibrium?
Country H elects to offer a 25% subsidy to exports of X. What is the equilibrium quantity of exports with this subsidy?
What is the producer surplus after the subsidy?
What is the government expenditure on the subsidy?
What is the deadweight loss due to the subsidy?
Calculate the “Terms of Trade” loss for H due to the subsidy.
(20 points) True or false. Explain your answers in clearly written paragraphs. Quality of explanation determines grade.
One possible development strategy for a country is to simultaneously engage in import substitution and export-driven growth.
A country that offers an export subsidy for good X must also impose an import tariff for good X.
(20 points) Water sold in small plastic bottles produces waste that contaminates the environment. Suppose the U.S. government passed strict new laws that levied special taxes on water sold in plastic bottles. One country, Fiji, has a comparative advantage in producing bottled water, much of which is consumed in the U.S. As a trade economist, what is your perspective on the impact of this law on the U.S. and on Fiji? Thinking beyond trade issues, what is your economic perspective on the law?
Answer this question in a short essay (say, approximately 500 words).
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