Samplex LE 1

1. According to gravity income model, what are the three factors that determine trade?
2. What is the difference between absolute and comparative advantage?
3. Why are there no income distribution effects in the Ricardian model?
a. How can this weakness be remedied?
4. In the Ricardian model with n goods, the demand for labor is said to be a derived
demand. Explain.
5. Within the context of a derived demand for labor in #4, as wage increases/decreases,
the demand for labor will decrease/ increase. Why?
6. Within the framework of comparative advantage, what is the chief advantage of the
Heckscher- Ohlin model over the Ricardian model? Explain briefly.
7. Within the framework of comparative advantage, cite one common feature in the two
models.
8. Why is there a positive relationship between relative goods prices and relative factor
prices in the Heckscher- Ohlin model?
9. In the Ricardian model, given Home’s productivity in cheese is alc; wine alw,
respectively. And given Foreign’s productivity in cheese and wine are a*lc and a*lw
respectively. State the condition for comparative advantage and explain why
comparative advantage exists.
10. Based in the HO model, state the condition for differences in factor intensities.
11. Based on the HO model and your answer in #10, what is the pattern of trade based on
the comparative advantage?
12. In the Ricardian model, when two countries trade on the basis on comparative
advantage, world equilibrium is determined by the intersection of the relative supply
and relative demand curves. However, specific gains/ precise gains from trade not be
determined exactly/accurately. Why?
13. If transport cost were to be included in the Ricardian model with n goods what would
happen to tradability of some goods? Why?
14. In the HO model, explain why it is true that if relative goods prices increase, factor cost
ratios will also increase?
15. What is the Leontiff paradox? In what manner does it contradict the HO model?
16. What assumption will produce a straight-lined PP Fronteir?
17. Where is Ricardian comparative advantage based on?
18. In the Ricardian model of comparative advantage, both goods will be produced under
what assumption?
19. State, in words: the condition/assumption in the Ricardian model for a country to
specialize in the production of one good.
20. Name one different feature/assumption of the Ricardian and HO models.
21. In the HO model, what are the gains from trade for each country?
22. What is the difference between direct and indirect trade?
23. What determines the quantity of production in the Ricardian model?
24. Under the Ricardian model, what determines the nominal wage? How about the real
wage?
25. Are there income distribution effects given there is only one factor?
26. In the HO model, what will happen to the output mix as one factor, say labor, increases
given constant relative prices?
27. Is trade the main factor contributing to increasing wage inequality?
28. According to Krugman, what are the 3 arguments for contending that trade was not
necessarily the main factor contributing to wage inequality?
29. What drives the inequality between income of skilled and unskilled workers?
30. Under the Standard Trade Model, what determines the quantity of production?
31. Under the Standard Trade Model, what determines the quantity of consumption?
32. Under the standard Trade Model, what will be the impact of an increase in the relative
prices?
33. How does terms of trade affect national welfare?
34. How is trade openness determined? measured?
35. How does international transfers affect a country’s term of trade?
36. Explain Ohlin’s argument against Keynes regarding Germany’s terms of trade.
37. Explain Keynes’ argument against Ohlin regarding Germany’s terms of trade.
38. What is the reason why most countries spend a much higher share of their income
39. on domestically produced goods than foreigners do?
Ricardian model with n-goods.
X1 X2 X3 X4 X5
ali 1 5 7 10 25
a*li 15 60 70 75 100

40. If relative wages, w/w* is 14, what will home and foreign produce?
41. If relative wages, w/w* is 10, what will home and foreign produce?
Ricardian model.
Y Z
HOME aly 1 alz 3
FOREIGN a*ly 3 a*lz 2

42. What is the relative price of Y (Py/Pz) in Home before trade takes place?
43. What is the relative price of Y (Py/Pz) in Foreign before trade takes place?
44. Is there a basis for Home and Foreign to engage in trade based on comparative
advantage? If yes, state the condition in an equation. If no, explain.
45. What is the pattern of trade as a result of the question above?
46. How much does Home gain from trade? How much does Foreign gain from trade?