Midterm examination

International Economics

Name: Lý thị Hương

Student ID: 18071114

QS 1. Explain Gravity Model and impediments to trade

The gravity model of international trade states that the volume of trade between two
countries is proportional to their economic mass and a measure of their relative trade
frictions. Perhaps because of its intuitive appeal, the gravity model has been the
workhorse model of international trade for more than 50 years. While the initial
empirical work using the gravity model lacked sound theoretical underpinnings, the
theoretical developments have highlighted how a gravity-like specification can be
derived from many models with varying assumptions about preferences, technology,
and market structure. Along with the strengthening of the theoretical roots of the
gravity model, the way in which it is estimated has also evolved significantly since
the start of the new millennium. Depending on the exact characteristics of
regression, different estimation methods should be used to estimate the gravity
model.

QS 2. What is mercantilism theory? Explain this theory by mind-map method

- Mercantilism defines an economic policy of trade practices that countries
adopt to grow their wealth and power by maintaining a favorable balance in
trade through increased exports and decreased imports
- During the 16th and 18th centuries, European nations like Great Britain and
France used this policy to import cheaper raw materials from their colonies
and export finished products to them in exchange for gold and silver coins
- Maintaining a favorable balance trade indicates a zero-sum situation where
one county’s loss necessary for another’s gạin
- Mercantilism defines an economic policy or trade practices that adopt to in
mercantilist trading, merchants and the government worked together to
accumulate focuses on wealth creation by allowing private companies to
export their goods with minimum or no government involvement
QS 3.
Explain the comparative advantage theory by Ricardo and do calculation for the case
below:

Viet Nam China

Rice 6 kg/person/hour 2 kg/person/hour

Cloth 4 m/person/hour 3m/person/hour

Which nation has comparative advantage of producing rice, which one has comparative
advantage of producing cloth? Suppose that each nation has totally 3 hours of production
and the exchange rate: 6kg rice = 6m cloth. How do Vietnam and China gain from
international trade? Show the diagrams illustrating it.

Opportunity cost of producing rice VietNam and China

Viet Nam;6 Rice=1 hour=3 Cloth 6/6R=3/6C 1R=0,5C -> Vietnam opportunity cost in
producing rice is 0.5 unit of cloth
China: 2 Rice= 1 hour = 4 Cloth 2/2R=4/2C 1R= 2C -> China opportunity cost in
producing rice is 2 unit of cloth
VietNam has comparative advantage in producing rice since the opportunity cost is lower
than China
China has