1. Describe the differences between an open economy and a closed economy. Describe the process as to how GDP can increase once a closed economy opens up to the rest of the world. How does this opening up of the closed economy affect domestic prices and economic welfare? You are encouraged to offer graphs in support of your answers wherever possible. (Limit: 2 pages; Ideally, between 1 – 1.5 pages)
2. Suppose that the world is divided into two sovereign countries, Country 1 and Country 2. There are two commodities in the world: cloth and food. Each country has a fixed endowment 150 units of labor and each can produce both the commodities but they differ in terms of their prevailing technologies. Country 1 can make a unit of cloth using 2 units of labor and a unit of food by using 1 unit of labor. Country 2 can make a unit of food using 2 units of labor and a unit of cloth by using 1 unit of labor. Draw the production possibility frontier of country 1. Draw the production possibility frontier of country 2. Draw their joint production possibility frontier. What should each country produce if they are allowed to trade with one another? What do you think should be the exchange rate between food and cloth in an open economy situation? (Limit: 2 pages; Ideally, between 1 – 1.5 pages)
3. Refer to the National Public Radio story referred above. Suppose, Africa is thinking to go from open economy to closed economy to stop US and European Union from flooding its market with subsidized agricultural products. Imagine that you are hired as a policy consultant to reflect on that proposed policy. What should be your recommendation and why? (Limit: 2 pages; Ideally, between 1- 1.5 pages)
•“U.S., European Subsidies Undercut African Farmers”, National Public Radio, October 13, 2006, https://www.npr.org/templates/story/story.php?storyId=6256274