Determining authorship for a committee’s prelim exam is difficult. The fact that this copy of the exam was found in Lloyd Metzler’s papers is a sign that he likely had a hand in composing at least part of the exam. One can see an inconsistency in British/US spelling (labour vs. labor) that leads me to conclude that Harry Johnson was also likely a co-author.
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INTERNATIONAL TRADE
Preliminary Examination for the Ph.D. and A.M. Degrees
Winter 1970
WRITE THE FOLLOWING INFORMATION ON YOUR EXAMINATION PAPER:
Your code number and NOT your name
Name of Examination
Date of Examination
(Write in Black Ink)
Results of the examination will be sent to you by letter.
Answer all questions. Time: 4 yours
- Answer question (a) or (b)
- Assume a Heckscher-Ohlin model economy in which one of the two products is the capital good, population is constant; and a certain fixed proportion of the existing capital stock wears out each year. The economy devotes a certain proportion of the value of its annual output to gross saving.
- Analyse the long-run equilibrium of the economy, in isolation from foreign trade.
- Analyse the effects of the opening of trade at fixed terms of trade on the economy’s long-run equilibrium.
- Comment on the implications of your analysis for the conflicting views that free trade is the best policy, and that tariffs promote economic development.
- Assume, in contrast to the Heckscher-Ohlin model, that while labour is mobile between the two industries capital is specific to its industry (and in the closed economy fixed in quantity in each industry).
- What can you conclude about the effects of the opening of free trade on factor prices, assuming factors immobile?
- How are these conclusions altered by the assumption that capital in one industry is internationally mobile but remains sector-specific (i.e. a certain stock of capital is confined to the automobile industry, but can locate in either “Canada” or “The United States”?
- What would be the effects of the imposition of a tariff on Canadian imports of automobiles, on the location of production and on factor prices?
- Assume a Heckscher-Ohlin model economy in which one of the two products is the capital good, population is constant; and a certain fixed proportion of the existing capital stock wears out each year. The economy devotes a certain proportion of the value of its annual output to gross saving.
- Answer question (a) or (b)
- Keynes argued that in a system of flexible exchange rates involving a forward market, the forward rate has a constitutional weakness of the demand side. Thus, he said that while there are many asset holders with foreign assets who would like to hedge by selling forward exchange, there are few holders of foreign liabilities who would like to hedge by purchasing forward exchange.
- Assuming that interest rates are the same at home as abroad, what does this imply with respect to the discount or premium of the forward rate, all rates being measured in terms of the domestic-currency price of the foreign currency?
- Discuss the validity of Keynes’ argument, first on the assumption that inter-market arbitrage exists, and second on the assumption that it does not.
- A given country produces two commodities, food and manufactures, with two factors, labour and land. Suppose that food is land-intensive in the sense that the optimal ratio between land and labour is higher than in manufactures for all factor price ratios. Suppose further, that the production functions for both commodities are homogeneous of the first degree so that increasing the inputs of labour and land by fifty per cent in any commodity, increases output, also by fifty per cent.
- Given fixed amounts of labour and land, prove that the product-substitution schedule has the characteristics of a diminishing returns schedule, despite the fact both food and manufactures are produced at constant cost.
- How do you account for this appearance of diminishing returns?
- Suppose that Country A has a larger land-labour ratio than Country B. Is it possible that A may nevertheless import food, the land-intensive commodity and export manufactures, the labor-intensive commodity? Indicate graphically how this may occur. Is this result inconsistent with the Heckscher-Ohlin theorem that international trade raises the prices of the low-cost factors and lowers the prices of the high-cost factors? Explain.
- Is it a possible explanation of the Leontief paradox, which shows that the United States exports labour-intensive commodities and imports capital-intensive commodities?
- Keynes argued that in a system of flexible exchange rates involving a forward market, the forward rate has a constitutional weakness of the demand side. Thus, he said that while there are many asset holders with foreign assets who would like to hedge by selling forward exchange, there are few holders of foreign liabilities who would like to hedge by purchasing forward exchange.
- Suppose the world is composed of two large blocs and a few other countries. Suppose that the two large blocs do not intervene in the exchange market. Analyze, in the context of the optimum currency area literature, the consideration which would persuade one of the outside countries to peg their currency to one rather than the other currency area.
- It has been shown by Mundell that if one factor is internationally mobile and a country imposes a tariff on imports, the result will be the termination of international trade. What happens if the country simultaneously imposes a tax on the earnings of the factor that moves?
- “The ‘Keynesian’ theory of devaluation developed by Joan Robinson, James Meade, A. C. Harberger, H. G. Johnson and others depends on the assumption of ‘money illusion’ on the part of the labour force. If that assumption is replaced by the assumption that wages in the long run are determined according to the theory of marginal productivity, a completely new theory of devaluation has to be developed.”
Discuss this quotation, and if you agree with it sketch the nature of the new theory required. - “The optimum tariff argument for protection is the only valid first-best economic argument for a tariff. All the other arguments are either second-best economic arguments, non-economic arguments, or non-arguments.”
Discuss, giving examples. How would you describe the infant-industry argument? - Discuss the main arguments for and against the following proposed solutions for the adjustment problem of the international monetary system:
(i) the “wider band”
(ii) the “crawling peg”
(iii) a rise in the price of gold
- Answer question (a) or (b)
- “The established version of the theory of effective protection is unsatisfactory because it attempts to combine a general equilibrium theory of demand with a partial-equilibrium theory of supply. If the usual Heckscher-Ohlin assumptions about production are made, the theory falls apart.”
Discuss this quotation. - or
- Discuss the controversy between Johnson and Metzler concerning the transfer problem under the conditions postulated by Keynes. (You need not indicate what you regard as the correct result but only what were the main points of the controversy.)
- What changes were made by Metzler in the orthodox or prevailing theory, generally but erroneously attributed to Ohlin? Show that these changes are in accord with Johnson’s “Suggestions for Simplifying Balance of Payments Theory.”
- “The established version of the theory of effective protection is unsatisfactory because it attempts to combine a general equilibrium theory of demand with a partial-equilibrium theory of supply. If the usual Heckscher-Ohlin assumptions about production are made, the theory falls apart.”
Source:Duke University. David M. Rubenstein Rare Book and Manuscript Library. Economists’ Papers Archive. Papers of Lloyd Appelton Metzler, Box 9, Folder “Exams 302”.
Image Source: Tariff reform–Cleveland and Thurman, ca. 1888 from Library of Congress Prints and Photographs Division Washington, D.C. 20540 USA
