Domande e risposte esame prof Ferri

European Values in the Global Economy: Sample of Questions Used in Previous Exams

(Please be aware that these questions are only indicative and could differ from the actual questions in your exam)

Values

1. Referring to the essay by Alesina – Glaeser – Sacerdote (2001) [Why Doesn’t the U.S. Have a European-Style Welfare State?] discuss the main explanations provided by the authors for this visible difference in social policies across the Atlantic Ocean.

The authors studied the effect of the level of inequality in society with a survey question about happiness. If the gap in the distribution between rich and poor is high, the happiness is low. This effect is more precisely defined in Europe than in the US. This is because Americans live in a mobile society where efforts can improve people's situation; instead of Europeans that live in less mobile societies: social programs are more generous, EU tax systems are more progressive, and regulations designed to protect the poor are more intrusive. EU governments redistribute income among their citizens on a much larger scale than US governments, because Americans perceive the poor as lazy, instead of Europeans who perceive the poor as unfortunate. Europeans believe that the poor are trapped in poverty, that luck determines income, and success in life is also determined by forces outside our control much more than Americans. In conclusion, we can say that another difference is the US materialism, caused by socio-economic, cultural, and educational reforms (developed in the last 30 years) oriented towards very high levels of competition and possessions.

2. What do we mean by the “Easterlin Paradox”? Discuss the role of GDP per capita and of relational goods in the context of different peoples’ values.

The Easterlin paradox explains that “high incomes do correlate with happiness, but long-term increased income doesn't correlate with increased happiness.” So when income increases, happiness initially will increase but then begin to decrease following an inverted U curve. Happiness and GDP are unrelated in the long run while happiness and sociability are strongly and positively related. When income increases, also available alternatives increase: this is the reason why economists consider GDP as an indicator of happiness. Another effect is related to relational goods: when relations became worse and the income increases, if income increases again, relations get worse so happiness and well-being decrease. The improvement of well-being due to income is canceled by the worsening of well-being due to the deterioration of relational goods. If the increase of income produces negative effects in quality and quantity of our relational goods, the total effect of income's improvement on happiness is negative over a threshold of income.

Trade Theory

3. Why often there is not enough support for free trade? Give some examples of those who oppose it.

There are two main cases against free trade:

• The introduction of a tariff lowers the price of imports in world markets and generates a terms of trade gain. An optimum tariff will maximize the national welfare.
• Domestic market failure: if some domestic markets fail to function, deviating from free trade can help reduce the negative consequences. We can talk about the theory of the second best: government intervention that distorts market incentives in one market may increase national welfare by compensating the consequences of market failure elsewhere.

4. In the Ricardian Model there are only 2 goods: cheese and wine. The productivity coefficients are: a_LC = 1 hours/pound; a_LW = 2 hours/pound; a*_LC = 2 hours/pound; a*_LW = 5 hours/pound. In which good does Home have a comparative advantage? How will Home trade with Foreign?

a_LC/a_LW = 1/2 > a*_LC/a*_LW = 2/5 --> the opportunity cost of producing cheese is ½ gallon of wine for home. a_LW/a_LC = 2 < a*_LW/a*_LC = 2.5. Home has a comparative advantage in producing wine because it has a lower opportunity cost, and home is more efficient in both. Home will buy cheese from the foreign state using income generated from that production. Foreign country is less efficient in both, but has a comparative advantage in cheese production.

5. Evaluate the causes and effects of international labor mobility within the Specific Factors Model.

Workers migrate to wherever wages are highest. Without barriers, workers move to foreign until the purchasing power of wages is equal across countries. Due to barriers, wages do not equalize: at home, the emigration decreases the supply of labor and increases the real wage; in foreign, the migration increases the supply of labor and decreases the real wage. World output will increase because labor moves to where it's more productive: the value of world output is maximized when the marginal product of labor is the same across countries. Workers at home benefit; workers in foreign are hurt by inflows. Landowners in home are hurt because migration increases wages and decreases output. Landowners in foreign gain because wages decrease and output increase.

6. Suppose there are only 2 countries, 2 inputs, and 2 outputs. What does the Rybczynski’s theorem tell us? Discuss the ways in which that effect comes through.

The Rybczynski's theorem tells us that if a country holds output prices constant and the amount of a factor of production increases, then the supply of the good that uses this factor intensively increases and the supply of the other good decreases. An economy's labor force grows and its ratio of labor to capital (L/K) increases. At a given relative price of cloth, the ratio remains constant. To employ an additional worker, the economy expands production of the relatively labor-intensive good and contracts production of the relatively capital-intensive good. An economy will tend to be relatively effective at producing goods that are intensive in the factors with which the country is relatively well endowed.