(tr) Lahore University Of Management Sciences School of Humanity, Social Sciences and Law Fv Roll # ‘Total Pages; Quarter: Fail Semester ‘Course Title: _ International Trade Academic Year; 2009 — 2030 ‘Course Code: Econ 351 Date; _ 28/10/2009 Iastructor; _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. => BO NOT OPEN THIS EXAM UNTIL => Keep your eyes on your own paper. TOLD TO DO sO, = You may not = Read all questions very carefully before answering «talk to anyone once she exam begins. them + leave the examination roam and then return. => Check the number of papers in the question sheet and make sure the paper is complete. Open/Closed book/notes, help sheet: _| Closed book / Closed notes. [3] 15, [ia] 20 [15] 21 7 7 7 tof 2 ite ist é i ition I ‘Multiple Choice Questions Total marks 40 (Bach question earries equal marks) 1. [fa very small country trades with a very large country according to the Ricardian model, then the small country will suffer a decrease in economic welfare. the large country will suffer a decrease in economic welfare the small country will enjoy gains from, trade. the large country will enjoy gains from trade. None of the above. moap If the world terms of trade equal those of country F, thea country H but not country F will gain rom 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. moam> In order to know whether a country has a comparative advantage in the production of ane particular product we need information on af least_unit labor requirements A one B c D. E. Tre4. A nation engaging in trade eccording to the Ricardian model will find its ion bundle ‘consumpti A. B. on its production possibilities frontier. C. outside its production possibilities frontier. D. inside its rade-partner’s production possibilities frontier. E, nits trade-partner’s production possibilities frontier. Specific Factor Model 5. In the Specific Factors model, each of the two sectors ‘A. employs the same factors used by the other. B. employs different factors than those employed in the other. C. employs a fixed coefficient production function. D. shares one factor of production with the other sector. E, —_Noneof the above. 6. In.an economy described by the Specific Factors Model, the production possibility frontier will be A linear B. concave to the origin, convex to the origin. D. _ parabolic with one root. E, collapsed to a point, 7. Ifthe price of the capital intensive product rises, wages will ‘A. rise but by less than the price of the capital-intensive product. B, rise by more than the rise in the price of the capital intensive product. C, remain proportionally equal to the price of the capital-intensive product. D. fall, since higher prices cause less demand, E ‘None of the above,8. If Japan is relatively capital zich and the United States i trade between A B. c, Dd E, relatively land rich, then these two, formerly autarkie countries will lead to perfect specialization with Japan alone producing manufactures, 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. 9. [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. ©, higher marginal produetivity of labor in manufacture sector. D. lower lator input in manufacture sector. E, None of the above. ‘Heckscher Obtis 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. EB 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 in a country might lose welfare due to trade, the fact that the country as a whole will gain from trade None of the above. 12, The Leontieff Paradox Poap> 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.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 9 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 ance trade begins POOR> ‘wages and rents should rise in HL ‘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. 1S. 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, ‘A. European landowners should support US-European free trade, B. —_ European capitalists should support US-European free trade, C. all capitalists in both countries should support free trade, 1D. alll landowners should support free trade. EB None of the above. Standard Trade Mode} 16. If Pc / Prwere to increase, mpopPp 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. {ftwo countries with diminishing returns and different marginal rates of substitution between two products were to engage in trade, then AL BOE Be 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, 18, Export-biased growth in Country H will A B. C. D. E. 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. 19, Ag increase in a country's net commodity terms of trade will always A. B. ¢. D. E. increase the country’s economic welfare. increase the country’s real income. increase the country's quantity of exports. increase the country's production ef its import competing good, None of the above. 20, 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 moomP the world's relative price for food remains unchanged. the world’s relative price for food increase. the world’s telative price for food decrease, the world relative price for both food and non-food rise, None of the above.Section I 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 & ¥, 5 goods, A, B, CD & 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 8 c 20 15 D $ 10 E 10 5 a) Country X has the highest relative productivity advantage in good @ ) If the wage rate in country X is $S/hour and the wage rate in country Y is $15 per hour, country ¥ would produce goods @ ¢) There is an increase in the supply of labour in country ¥, resulting ina fall in the wage rate to SS/hour, country Y would now praduce 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-counttry, 4, produces two goods, i and j, using two factors of produetion, labour (L) and capital (K). The production technologies are the following: Qi= min (K,2L) Qj=SKL In the space provided below derive and show the relationship between the capital Jabour ratio and the wage-rental ratio in both the sectors, Also clearly illustrate the implication of the relationships derived. 20)3, Now assume that the production technologies in country A, for goods # and j are the following: Qiemin(L,K/2) ‘Qjrmin(L.2K) ‘The initial price of good J and fis $10 and $5 respectively, Trade results in an inerease in the price of good { to $15 while the price of good j remains the same. In the space provided below show (compute) the Stojper-Samuelson effect of trade on factor returns. (20)4) The production functions of country 4, are of the following general form: QieQi(LK) Q-Qi(LK) kiPkj and ‘The above functions are constant returns to scale and exhibit positive and diminishing rotums to both factors of production, Assuming that country 4 isin a trade equilibrium with country 8, and that, KE oke Illustrate in the space below the impact of growth in the export sector of country 4 on the welfare of country 4 under the following eases: @, Both country's are large and the elasticity of demand and supply of country A’s export gond is relatively small, (10) b. Country A is small and the elasticity of demand and supply of its export good ig high. (10)