International economy questions and answers

SE-404 International Economics Assignment 1

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March 2010

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Part A 10 Multiple-choice questions. In all questions only one option is correct. (20%) A1: “Trade is generally harmful if there are large disparities between countries in wages.” B) This is generally false. Page 41 A2: The gravity model explains why A) Trade between Sweden and Germany exceeds that between Sweden andSpain. Page 15,16, 24. A3: Trade between two countries can benefit both countries if A) Each country exports that god in which it has a comparative advantage. Page 29 2nd paragraph A4: According to Ricardo, a country will have a comparative advantage in the product in which its B) Labor productivity is relatively high. A5: In the Ricardian model, comparative advantage is not likely to be due to D)All of the above. Chapter 3 A6: In the 2-factor, 2 good Heckscher-Ohlin model, the two countries differ in D) Relative availabilities of factors of production. Pg 54 A7: The slope of a country’s PPF reflects A) The opportunity cost of product S in terms of product T. pg30 A8: The concept “terms of trade” means C) The price of a country’s exports divided by the price of its imports. Pg89, myeconlab A9: Where there are economies of scale, the scale of production possible in a country is constrained by D) The size of the domestic plus the foreign market. Pg 125, my econlab. A10: A problem encountered when implementing an “infant industry” tariff is that B) The industry may newer “mature.”pg 252

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Part B Short questions. Write short, structured and clear answers (no more than 10lines) (30%) B1: International Trade theory is one of the oldest areas of applied economic policy analysis. It is also an area for which data was relatively widely available very early on. Why do you suppose this is the case? International Trade is one of the oldest areas of applied economic policy analysis because trade was a very important activity for the countries where economic science wasdeveloped as we know it today. In fact, trade has always been an important activity for all countries given than no country is isolated from the rest of the world. As far as there was a society, there were taxes that had to be paid, there were people who kept track of the sales in order to pay taxes and a higher office or official who received and stored that information. B2: When comparing thecomposition of world trade in the early 20th Century to the early 21st Century, we find major compositional changes. These include a relative decline in agricultural and primary-products (including raw materials). How would you explain this in terms of broad historical developments during this period? The change in the composition of trade presented between the early 20th and 21st centuries is a result ofchanges in the issues mentioned in the table below. 20th Century Agricultural based economy Raw materials High cost and unreliable transportations Difficult communication 21st Century Manufactured goods economy High technology goods Low cost and reliable Transportations Easy fast communication

During this period the major development was the Globalization, driven by the improvement oftransportation and communication, making it easy to overcome the geographical distances. The effect of this can be seen by the new types of service trades such as transportation fees charged by air lines and shipping companies, insurance fees of foreigners, spending by the tourists and increase in overseas. Developing countries entered in to world trade and they are now exporting manufactured goods. Forexample, more than 90% of exports of China consist of manufactured goods. From the economic perspective, primary goods have become relatively cheaper compared to finished good. B3: Why is the H.O. model called the factor-proportions theory? The H-O model incorporates a number of realistic characteristics of production that are left out of the simple Ricardian model.

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The standard H-O model...