Econ Final Exam Review

Topics: Free trade, International trade, Tariff Pages: 8 (1648 words) Published: December 14, 2014
1. (5 pts)What is the Hecksher-Ohlin Theory of Comparative Advantage?

This is a theory developed by two Swedish economists to explain how countries develop comparative advantage in certain areas rather than others.

The model works as follows:
1) Assume every country, for the most part, has access to the same technology. 2) Still, factors of production are difficult to move across national boundaries. 3) It follows from (2) that factors of production are relatively bound by geography and national borders, and that not every country can obtain the proportions need to maximize production. 4) Because the amount of productive resources differs between each country, it follows that countries will have comparative advantages in products that are intensive in factors that they have an abundance of.

(5 pts) Apply this model to explain trade between Great Britain and the United States in mid-nineteenth century.

Applying the model to U.S.-Great Britain trade:
1) Great Britain had a relative abundance of labor and scarcity of land. 2) The U.S. had an abundance of land and scarcity of labor. 3) Great Britain should develop a comparative advantage in sectors that were labor intensive and not very land-using such as factory production, cotton, and ironworking. 4) The U.S. should develop a comparative advantage in goods that require lots of land but little labor, such as wheat and corn. 5) Great Britain and the U.S. did develop comparative advantage in their expected areas, and the theory is supported by historical data.

2. (2 pts) What were the Corn Laws?

The Corn Laws were laws that created high tariffs on foreign grains

(3 pts) Explain how and why they were finally repealed.

These laws were repealed for several reasons. For one, the arguments of David Ricardo showed the economic benefits of free trade. Another was the fact that industrialization in Britain had much to gain by repealing these laws. As such, they, particularly represented by the actions Richard Cobden, took measures to influence the government to repeal them. Robert Peel started anti-Corn Law groups that were effective in turning more of the public to be in favor of repealing the Corn Laws. Peel was elected Prime Minister and he took measures to reorganize the British fiscal system, particularly imposing an income tax to make up for lost revenue on certain tariffs—he did not repeal the Corn Laws however. The Corn Laws were ultimately repealed because the Irish Potato Famine caused the price of potatoes to skyrocket, depriving people of a cheap source of food. Since people needed a cheap source of food, Britain repealed the Corn Laws, making corn cheaper to buy. This was the most important part of the treaty. It said that if one party of the treaty negotiated removal of trade barriers with another party, then it followed that the other country in the treaty had negotiated trade barriers of the same goods with the new country as well. So, if France had a treaty with Britain, and France afterwards negotiated with Germany to have both remove trade barriers, then Great Britain would also have its trade barriers removed with Germany on those goods it did so with France. This is significant for integrating the European economy and opening up free trade.

(3 pts) List the major provisions of the Cobden-Chevalier Treaty (Anglo-French Treaty).

1) The British were required to remove all trade prohibitions and import tariffs on all goods except brandy and wine, which they were allowed to keep a small tariff on for revenue purposes. 2) The French were required to remove all trade prohibitions and reduce or get rid of all tariffs on importation of British goods. This decreased to a 15% ad valorem tax.

(2 pts) What is the “most-favored nation” clause?

It said that if one party of the treaty negotiated removal of trade barriers with another party, then it followed that the other country in the treaty had negotiated...
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