Lahore University Of Management Sciences School of Humanity, Social Sciences and Law Roll #: Total Pages: 1 Quarter: Fall Semester Course Title: _ International Trade Academic Year, 2009 — 2010 Course Code: _ Econ 351 Date; 28/10/2009 Instructor: —Turab Hussain Time Allowed: 100 minutes Exam: “Midterm, ‘Total Marks: —100 ‘The instructions below must be followed strictly. Failure to do so can result in serious grade loss. > DO NOT OPEN IL => Keep your eyes on your own paper. TOLD TO DO SO. => Youmay rot => Read all questions very carefully before answering ‘© talk to. anyone once the exam begins. them. © leave the examination room and then return. => Check the number of papers in the question sheet and make sure the paper is complete, ‘Specific instructions: Any other instruction(s): 1 7 7 7 Bl 7 2/7 8 Z 14/7 3 7 3 7 isl 7 4{7 io] 7 16[ 7 5 7 nf] 7 wl 7 el 7 rl 7 i] 7 i / 13, Now assume that the production technologies in country A, for goods i and j are the following: Qi=min(L.K/2) Qj=min(L.2K) ‘The initial price of good i and j is $10 and $5 respectively. Trade results in an increase in the price of good i to $15 while the price of good j remains the same. In the space provided below show (compute) the Stolper-Samuelson effect of trade on factor returns. 20)4) The production functions of country 4, are of the following general form: Qi Qi (L,K) QQ) ki>kj and The above functions are constant retums to scale and exhibit positive and diminishing retums to both factors of production. Assuming that country A is in a trade equilibrium with country B, and that, KP >k* Ilustrate in the space below the impact of growth in the export sector of country 4 on the welfare of country 4 under the following cases: a. Both country’s are large and the elasticity of demand and supply of country A’s export good is relatively small, (10) b. Country A is small and the elasticity of demand and supply of its export good is high. (10)Section I Multiple Choice Questions Total marks 40 (Each question carries equal marks) Ricardian Model Ll Ifa very small country trades with a very large country according to the Ricardian model, then the smell country will suffer a decrease in economic welfare. the large country will suffer « decrease in economic welfare. the smal! country will enjoy gains from trade. the large country will enjoy gains from trade. None of the above. MOORD .. If the world terms of trade equal those of country F, then country H but not country F will gain from trade. country H and country F will both gain from trade. neither country H nor F will gain from trade, only the country whose government subsidizes its exports will gain. None of the above. POOSD . In order to know whether a country has a comparative edvantage in the production of one particular product we need information on at least _unit labor requirements A. one B. two Cc three D. four BE. five4, A nation engaging in trade according to the Ricardian model will find its consumption bundle A, __insideits production possibilities frontier. B. on its production possibilities frontier. C. outside its production possibilities frontier. D. __inside its trade-partner’s production possibilities frontier. E, omits trade-partner's production possibilities frontier. Specific Factor Model 5. In the Specific Factors model, each of the two sectors POORP> employs the same factors used by the other. employs different factors than those employed in the other. employs a fixed coefficient production function. shares one factor of production with the other sector. None of the above. 6. nan economy described by the Specific Factors Model, the production possibility frontier will be moooP linear, concave to the origin, conver to the origin. parabolic with one root. collapsed to a point. 7. If the price of the capital intensive product rises, wages will noopp> rise but by less than the price of the capital-intensive product. rise by more than the rise in the price of the capital-intensive product. remain proportionally equal to the price of the capital-intensive product. fall, since higher prices cause less demand. None of the above.8. If Japan is relatively capital rich and the United States is relatively land rich, then trade between these two, formerly autarkic countries will lead to perfect specialization with Japan alone producing manufictures. create a world relative price of food that is lower than that of the U.S lower the price of food in both countries. raise the price of food in both countries. None of the above. PoOR> 9. If additional land were to be brought into cultivation in the Specific Factor model, the output of manufactures would fall because of ‘A. lower marginal productivity of labor in this sector. B. _ lower marginal productivity of labor in food production. C. higher marginal productivity of labor in manufacture sector. Dd. lower labor input in manufacture sector. BE None of the above. Heckscher Ohlin Model 10. The Heckscher-Ohlin model assumes that are identical in all trading countries A. tastes B. technologies c factor endowments D. Both A. and B. E. None of the above, 11. If tastes differed between countries, this could affect wage equalization due to trade with no specialization. the direction of trade (who exports what to whom). the fact that some groups ina country might lose welfare due to trade. the fact that the country as 2 whole will gain from trade. None of the above. Leontieff Paradox supported the validity of the Ricardian theory of comparative advantage. supported the validity of the Heckscher-Ohlin model. failed to support the validity of the Ricardian theory. failed to support the validity of the Heckscher-Ohlin model. proved that the U.S, economy is different from all others. 5 moOm> 2 mounB>13. According to the Heckscher-Ohlin model, if the United States is richly’ endowed in human-capital relative to Mexico, then as NAFTA increasingly leads to more bilateral free trade between the two countries, moo 8 BP the United States will find its industrial base sucked into Mexico. Mexico will find its relatively highly skilled workers drawn to the United States. ‘The wages of highly skilled U.S. workers will be drawn down to Mexican levels. ‘The wages of highly skilled Mexican workers will rise to those in the United States. ‘The wages of highly skilled Mexican workers will fall to those in the United States. 14. Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively labor abundant, then once trade begins mone ‘wages and rents should rise in H ‘wages and rents should fall in H wages should rise and rents should fall in H. wages should fall and rents should rise in H. None of the above. 15, Suppose that there are two factors, capital and land, and that the United States is relatively land endowed while the European Union is relatively capital-endowed. ‘According to the Heckscher-Ohlin model, BOOD> St European landowners should support US-European free trade European capitalists should support US-European free trade. ail capitalists in both countries should support free trade, all landowners should support free trade. None of the above. Trade Model 16. If Pc / Pp were to increase, moow> the cloth exporter would increase the quantity of cloth exports. the cloth exporter would increase the quantity of cloth produced. the food exporter would increase the quantity of food exports. Both A and C. None of the above.17. Iftwo countries with diminishing retums and different marginal rates of substitution between two products were to engage in trade, then 20. ep moow moow> PONDS the shapes of their respective production possibility frontiers would change. the marginal rates of substitution of both would become equal. the larger of the two countries would dominate their trade. the country with relatively elastic supplies would export more. None of the above. . Export-biased growth in Country H will improve the terms of trade of Country H. trigger anti-bias regulations of the WTO. worsen the terms of trade of Country F (the trade partner). improve the terms of trade of Country F. decrease economic welfare in Country H. . An increase in a country’s net commodity terms of trade will always increase the country's economic welfare, increase the country's real income, increase the country’s quantity of exports. increase the country's production of its import competing good. None of the above, After WWI, Germany was forced to make large reparations - transfers of real income-to France. If France's demand was biased toward food (relative to Germany's demand pattern) then we would expect to find roomp the world's relative price for food remains unchanged. the world's relative price for food increase. the world’s relative price for food decrease. the world relative price for both food and non-food rise. None of the above.Section II Short Questions Total marks 60 Instructions: There are a total of four questions in this section. Attempt three questions including question 1, Question 1 is compulsory. 1, Assuming two countries, X & Y, 5 goods, A, B, C, D & E and one factor of Production, L (labour). The unit labour requirements for each good are given in the table below: Unit labour requirements (hrs of labour) Good Country X Country Y A 36 12 B 6 18 c 20 15 D 5 10 E 10 5 a) Country X has the highest relative productivity advantage in good “ b) If the wage rate in country X is $S/hour and the wage rate in country ¥ is $15 per hour, country Y would produce goods ) ©) There is an increase in the supply of labour in country Y,, resulting in a fall in the wage rate to $S/hour, country Y would now produce goods @ 4) In the space provided below, show the comparative static effect of the increase in the labour supply, on the pattern of specialization: ®2. A country, A, produces two goods, i and j, using two factors of production, labour (D and capital (K). The production technologies are the following: Qi=min (K,2L) Q=SKL In the space provided below derive and show the relationship between the capital labour ratio and the wage-rental ratio in both the sectors, Also clearly illustrate the implication of the relationships derived. (20)