1) As COVID-19 continues to spread, a severe decline in aggregate economic welfare is expected, resulting from a series of shocks to aggregate supply and aggregate demand. Focusing on the consumer goods market only (i.e. partial equilibrium), the following shocks have been observed or are expected across the globe (assume these are the only shocks and that they occur sequentially):

· Shock 1: Measures to contain the spread of the disease, including quarantine and social distancing, reduce the number of hours worked;

· Shock 2: Lower production, coupled with measures to restrict the flow of goods, disrupt supply chains;

· Shock 3: Non-permanent workers in affected industries start to be laid off and lose income;

· Shock 4: Households increase precautionary savings;

· Shock 5: Firms, especially those more dependent on cash flows, lack liquidity to fulfill commitments and file for bankruptcy;

· Shock 6: As businesses close, more workers are laid off and more income is lost.

a. For each of the six shocks described above, identify whether it affects aggregate supply or aggregate demand.

b. Based on your response to question a, draw a partial equilibrium graph for the world, showing the initial equilibrium and the effects of each of the shocks on aggregate supply or aggregate demand (Note: as the graph is supposed to represent the world, quantity consumed must equal quantity produced and each individual shift should be clearly indicated).

c. Based on your response to question b, what is the expected effect of COVID-19 on aggregate producer surplus, aggregate consumer surplus and aggregate welfare? Identify the areas in the graph that represent each of these effects.

2) Prior to the health crisis, the United States had imposed tariffs on a number of medical devices produced in China.

d. Assuming the United States is a large importer of medical devices, draw a partial equilibrium graph and explain the potential effects of the tariff on the United States’ domestic production, domestic consumption and imports of medical devices, as well as on the country’s aggregate welfare prior to the crisis.

e. Draw a partial equilibrium graph and explain the potential effects of the tariff on China’s domestic production, domestic consumption and exports of medical equipment, as well as on the country’s aggregate welfare prior to the crisis.

f. As demand for medical devices increased dramatically with the spread of COVID-19, many countries, including the United States, started temporarily lifting the previously imposed tariffs in an effort to increase the availability of these essential goods. However, many economists suggest that the effectiveness of such measures may be limited – why would that be the case?

3) As demand for goods such as alcohol-based hand sanitizer increases exponentially, in many countries domestic firms are stepping up to help in the battle against COVID-19 (and responding to price incentives) by redeploying its factors to produce high-demand goods. For example, Brazil’s Ambev, Latin America’s biggest beer brewer, is now using one of its plants in the country to produce hand sanitizer. Brazil produces and exports beer, and produces and imports hand sanitizer, and the production of both goods utilizes capital and labor.

a. Assuming Brazil only produces beer and hand sanitizer, draw a general equilibrium graph (PPF) representing this shift in production and explain what happens to Brazil’s terms of trade, quantity produced and quantity consumed of each good, imports and exports, considering substitution and income effects.

b. Assuming the production of hand sanitizer is relatively capital intensive (as many workers have to stay home), explain, noting in your answer which trade theory applies, what would happen to aggregate welfare in Brazil, and to the returns (payments) to labor and capital as a result.

4) You were nominated to represent your country’s Trade Ministry in the national crisis committee responsible for coordinating the response to COVID-19. You were asked to recommend one trade policy instrument other than tariffs to support the fight. State which policy you would recommend, explain why, noting the policy’s potential effects on your country’s and the world’s aggregate welfare, and how you would implement it taking into account potential winners and losers. (Note: you must recommend a trade policy instrument, not financial, macroeconomic or other types of policies).