International Economics

Please choose one question from each section The maximum number of bonus questions can be answered is 2.   

   Questions:  Section   A – Ricardian Model & Specific Factors Model         (33 pts.)  

1-Suppose an hour’s labor produces 4 kg of rice and 8 meter of cloth in Nepal, and     2 kg and 8 meter in  Bangladesh. Using opportunity costs, explain which country will export cloth and which will export rice in trade? If you think Nepal and Bangladesh should trae rice and cloth, what principle you borrowed from Ricardo did you use? Discuss.   2-A country produces two crops – barley and wheat. Given the price of barley (Pb) and wheat (Pw), the relationship of labor allocation is shown as MLPb x Pb = MLPw x Pw = w, where MLPb and MLPw are marginal products of labor for the two. Suppose after opening up to trade wheat’s price increases by 15 percent and   barley’s price increases by 8 percent; in what percentages (any “possible” number) the wage increases and how the income distribution changes after opening up to trade?  

Bonus Question (10 points): Suppose the competitive wage is not the market wage thus there is unemployment. How that particular price change ocurring after opening up to trade might affect affect the income distribution? Discuss.  

   Questions: Section    B –Hecksher-Ohlin Model & Standard Trade Model         (33 pts.)  

1. Suppose in the year of 2012, Slovenia had a 2 million population and its capital stock worth of US $ 46,000 million, and the corresponding figures  are 10 million and US $ 544,000 million for Sweden. Answer the following, on the basis of this information i. Which country is capital abundant?  ii. How much capital stock the capital abundant country should lose to become labor abundant? iii. If production of cloth is labor intensive relative to the production of computers, which country would export cloth, if engaged in trade? iv. In which country the labor employed in production of computers is against the import of computers  (after opening up to trade), and why?  

              Bonus Question (10 points) : After opening up to trade, free market transactions               would bring certain losses for import competing sectors. Can you introduce the                mechanism or governmental policy which would make everbody richer (or some                people richer without making some not poorer) relative to before opening to                trade?. Discuss.  

2. Suppose Malaysia and Taiwan have same number of labor and capital and share same production technology.  Suppose Malaysia begins to export cloth to and import fish from Taiwan after openining up to trade (These countries constitute the market for cloth and fish). Use standard trade model to answer the following, on the basis of this information? i.) Show the relation between relative prices before opening to trade? Discuss. 

ii.) Show trade triangles for each country (Use PPF and social indifferences for both countries)? iii.) Suppose perfect competitive market conditions hold in fish and cloth markets. Suppose there is increase in demand for cloth resulting in increase in relative price of cloth (relative to fish prices) How it would affect the trade triangle of Malaysia?  

             Bonus Question (10 points) : Discuss how would your answer to 2B iii.) would                 change if cloth is inferior good for Malaysia? 

  Questions:  Section C – International Trade Policies & Intra-Industry Trade Model (34 pts.)  

1. Evaluate the impact of tariff on the welfare of importing country i. If the country is not big enough to affect world price (of that particular good) ?  ii. If the country is big enough to affect world price (of that particular good) ?  

                  Bonus Question (10 points) : Suppose that the government provides income transfers                to consumers (of the good referred above), how it would affect your answer to the               question. Discuss your answer in the light of the fact that the good (referred above) is               very small portion of the consumer’s budget? 

2. Suppose that fixed costs for a firm in the automobile industry is US $ 5 million and the marginal cost is constant and is US $ 17,000 per finished automobile. Because competition in the market increases with the number of firms, the market price falls as more firms enter into the  automobile market denoted by  P = 17,000 + (150/n), where n represents the number of firms in a market and P is the market price for automobile. Assume that the initial size of the U.S. and the European automobile markets are 300 million and 533 million, respectively. i. Calculate the equilibrium number of firms and equilibrium price of automobiles in the U.S. and European automobile markets without trade ii. Now suppose the United States decides on free trade in automobiles with Europe. The trade agreement with the Europeans adds 533 million consumers to the automobile market, in addition to the 300 million in the United States. How many automobiles firms will there be in the United States and Europe combined? What will be the new equilibrium price of automobile?