Shri Ram College of Commerce

Assignment B.A. (Hons)

International Economics

Instructions:
1. Answer any five questions.
2. Answers should be precise and to the point.
3. Marks will be scaled down and final marks will be given out of 25.
4. Scanned answer sheets should be mailed to rajeevsrcc@gmail.com in a single document PDF form.
5. File name should contain Name and Roll Number.

1. (a) ‘Does costless international trade based upon comparative cost advantage between two countries
over two goods lead to an increase in the real wages of the workers in each of the two countries?’
Answer this under two scenarios: i. when both countries specialize, and ii. When only one of them
specialize and other continue to produce both the goods. (5 Marks)

(b) The table 1 below shows labor endowments of two countries, India and Pakistan, and their unit
labor requirements for producing two goods, food and cloth.
Table 1 India Pakistan
Labor 300 600

Unit Labor Requirement

Food 2 4
Cloth 1 5

i) Fill the entries in the table 2 below, assuming that each country specializes completely in the good
in which it has a comparative advantage. Assume that with trade India consumes exactly 2/3 of the
two countries’ combined output of each good.
Table 2 India Pakistan
Free trade consumption
Food
Cloth

ii) How much does each country export and import of each good in the free trade situation? Do the
two countries gain from trade in this example?

iii) Construct the world relative supply curve.

iv) Now suppose world relative demand takes the following form: Demand for cloth/demand for
food = price of food/price of cloth.
a. Graph the relative demand curve along with the relative supply curve.
b. What is the equilibrium relative price of cloth?

v) Suppose that instead of 300 workers, Home had 500 workers. Draw relative demand and supply
curve and find the equilibrium relative price.
(5 Marks)
2. (a) ‘While labour mobility across countries results in the convergence in the real wages and increase in
the level of world output it has income distributional effects on the different factors of production (land,
labour and capital) in the origin (Home) and destination (Foreign) both countries.’ Elaborate upon this
statement with appropriate diagram (if required). (4 Marks)

(b) Suppose an economy has two sectors: the biotechnology sector and software sector. The output of
biotechnology sector XB is produced using capital (K) and biotechnologists (B), and, that of software
sectors XS is produced through capital (K) and information technologists (I). Show the allocation of
capital between the two sectors of the economy. There has been an increase in the relative price of the
output of the biotechnology sector as against the software sector due to the growing demand. Analyse
the impact of this relative price change on income distribution among factors using diagrams.
(6 Marks)

3. (a) Assume India and U.A.E. are trading partners. U.A.E initially exports oil to and imports food from
India. Using the standard trade model, explain how an increase in the relative price of oil, in relation
to food prices, would affect production and consumption of oil for U.A.E (assuming that the taste for
both goods is the same in both countries). If the income effect of price change of oil is greater than the
substitution effect, what would happen to oil consumption in U.A.E? (5 Marks)

(b) With the help of Intertemporal PPC, Indifference Curves and isovalue lines explain how two
countries gains from trade through borrowing and lending when Home PPC is biased towards future
consumption and Foreign’s PPC is biased towards current consumption. (5Marks)

4. (a) Elaborate upon Rybzynski theorem, Stolper-Samuelson theorem, Hecksher-Ohlin theorem and
Factor Price Equalization theorem. (6 Marks)

(b) “The world’s poorest countries cannot find anything to export. There is no resource that is
abundant—certainly not capital or land, and in small poor nations not even labor is abundant.” Discuss
with your understanding of the H-O model. (4 Marks)

5. (a) Suppose that fixed costs for a firm in the automobile industry (start-up costs of factories, capital
equipment, and so on) are $5 billion and that variable costs are equal to $17,000 per finished
automobile. Because more firms increase competition in the market, the market price falls as more
firms enter an automobile market or specifically, P = 17,000 + 150/n, where n represents the number
of firms in a market. Assume that the initial size of the U.S. and the European automobile markets are
300 million and 533 million people, respectively.
a. Calculate the equilibrium number of firms in the U.S. and European automobile markets without
trade.
b. What is the equilibrium price of automobiles in the United States and Europe if the automobile
industry is closed to foreign trade?
c. 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 automobile firms will there be in the United States and
Europe combined? What will be the new equilibrium price of automobiles? (6 Marks)

(b) Why intra-industry international trade based upon internal economies of scale and imperfect
competition creates winners and losers? Explain with appropriate diagrams? (4 Marks)

6. (a) In the presence of trade costs why do some firm sell both in domestic and foreign markets while
some firms survive in domestic market only? How the claims of dumping cannot always be justified
on economic grounds? (4 Marks)
 (b) Consider a monopolist in the steel industry of a small country. The monopolist faces a domestic
market demand defined by P = 100-Q/2 and its marginal cost schedule is MC=50+Q. Calculate
equilibrium quantity and price of the monopolist in the autarky. If this country enters into a costless
trade with the rest of the world the monopolist faces a world market price of 60 per unit. Find out the
new profit maximizing quantity for the monopolist. Calculate its profit maximizing quantity when the
government protects it by imposing a specific tariff of 10 per unit on the import of tariff. Instead of the
tariff if it is protected by an import quota of 10 units calculate the profit maximizing quantity and price
the monopolist will charge in the domestic market. (6 Marks)

7(a) Demand and supply curves of wheat for Home are D = 100 - 20P, S = 20 + 20P and demand and
supply curves of wheat for Foreign are D* = 80 - 20P, S* = 40 + 20P.
i. Derive and draw Home's import demand schedule. What would the price of wheat be in the
absence of trade? Derive and draw Foreign’s export supply curve and find the price of wheat
that would prevail in Foreign in the absence of trade.
ii. Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and
graph the equilibrium under free trade. What is the world price? What is the volume of trade?
iii. If a tariff of 0.5 imposed on import of wheat by Home, what will the change in Home price,
foreign price and the quantity of export and import?
iv. Show in the diagram: government revenue from the tariff, terms of trade gain, efficiency loss
and the net welfare effect of the tariff on the welfare.
v. Now suppose instead of the tariff a quota of 10 units is imposed by Home on the import of
wheat. Calculate new equilibrium price in the world market. Calculate the quota rent.
(6 Marks)

(b) The demand and supply curves for kiwifruits for Home are given by: D = 2000 – 40P and S = 800
+10 P respectively. The demand and supply curves for kiwifruits for Foreign (asterisked) are given by:
D* = 2500 – 30P and S* = 1500 + 20P respectively.

(i) Find the world equilibrium price of kiwifruit and pattern of trade when trade takes place
costlessly between Home and Foreign.
(ii) Beginning from part (i) calculate the net welfare effect of a specific export subsidy given by
Foreign at the rate of 20 per unit on the export of kiwifruit. (4 Marks)