CESAG LPSG2-2021

Course “International trade”: Evaluation 40%

Correction subject 2A

Questions (8):
Answer briefly to the following questions:

1) Internationalization of the financial sphere is quantitatively and qualitatively important: Yes No

2) International terms of trade determine gains from trade for participating countries: Yes No
3) Import justification includes strategic reasons: Yes No, except for strategic imports
4) Absolute advantage principle always permits to determine the specialization of counties: Yes No

Exercise (12):

Given the following table of production cost structure of 2 goods in these 2 countries:

Countries Good X(p1) Good Y Domestic relative prices

(p2)

Country A 8 10 8/10=0.8

Country B 12 3 12/3=4

Comparative costs 8/12=0.66 10/3=3.33

1) Show that in this case absolute advantage and comparative advantage principles lead to the
same result in terms of countries’ specialization.

According to absolute advantage countries specialize in the good with lower cost of production compared
to the other country. In this case A has a lower cost in the production of X (8<12) whereas B has a lower
cost in the production of Y (3<10). Therefore, country A should specialize in the production of X and B in
the production of Y.

According to comparative advantage countries specialize in the good with relatively lower cost of
production compared to the other country. This can be determined comparing domestic relative prices of
goods in countries. (Px/Py)A = 0.8 < (Px/Py)B = 4. Therefore country A should specialize in the production
of X and B in the production of Y. The same than the one got with the absolute advantage principle.

2) Compute the CPF of the countries in the good in which they are not specialized.

CPFs in country A: The country is specialized in X, total production is 18/8 = 2.5 X. CPFs in Y (maximum
consumption) in autarky is 2.5*0.8 Y (domestic relative price being X=0.8 Y) = 2 Y; Free trade CPF = 2.5*4 Y
(foreign relative price being X=4Y) = 6 Y.

CPFs in country B: The country is specialized in Y, total production is 15/3 = 5 Y. CPFs in X (maximum
consumption) in autarky is 5*1/4 X (domestic relative price being X=4Y meaning that Y = 1/4 X) = 1.25 X;
Free trade CPF = 5*1/0.8 X (foreign relative price being X=0.8 Y meaning that Y = 1/0.8 X) = 6.25 X.

3) For which international term of trade (ITOT) trade is viable between the 2 countries.
Trade is viable between the 2 countries if the ITOT belongs to the exclusive bracket of their domestic
relative prices. Here trade viable if the ITOT in in the bracket ]0.8 4[.

Correction subject 2B

Questions (8): Answer briefly to the following questions:

5) A country can be simultaneously net exporter and net importer: Yes No, except for different
goods
6) Give three impacts of FDIs on trade: i) follow export, ii) follow import, iii) access to new markets,
iv access to new sources of raw materials, v) investment and growth leading to more import
and/or export, etc.
7) Import justification includes strategic reasons: Yes No, except for strategic imports
8) Internationalization of the financial sphere helps in deciding specialization of countries: Yes
No

Exercise (12): Given the following table of production cost structure of 2 goods in 2 countries:

Countries Good X(p1) Good Y (p2) Domestic relative prices

Country A 8 2 8/2 = 4

Country B 12 6 2

Comparative costs 8/12 = 0.66 2/6 = 0.33

4) Complete the table and give the specialization of countries in goods X and Y.

Specialization of countries can be obtained comparing their domestic relative prices.

(Px/Py)A = 4 > (Px/Py)B = 2. Therefore, B should specialize in the production of X and A in the production
of Y.

5) Show that the free trade CPFs of countries are above their CPFs in autarky.

CPFs in country A: The country is specialized in Y, total production is 10/2 = 5 Y. CPF (maximum
consumption) in autarky is 5 Y or 5*1/4 X (domestic relative price being X=4Y meaning Y=1/4 X) = 1.25 X;
Free trade CPF = 5 Y or 5*1/2 X (foreign relative price being X=2Y meaning Y=1/2 X) = 2.5 X.

CPFs in country B: The country is specialized in X, total production is 18/12 = 1.5 X. CPF (maximum
consumption) in autarky is 1.5 X or 1.5*2 Y (domestic relative price being X=2Y) = 3 X; Free trade CPF = 1.5
X or 1.5*4 X (foreign relative price being X=4Y) = 6 X.

Free trade maximum consumption of the goods in which the countries are not specialized is higher than
the same in autarky. Free trade CPFs are above CPFs in autarky in the 2 countries.

6) How much of the good in which A is not specialized this country will receive against 100 units of
export to country B?
Country A is specialized in the production of good Y. Exporting to B will it against X (the country is looking
for X at the price in B). in country B X = 2 Y meaning that Y = 1/2 X. Therefore, 100 Y = 100/2 X = 50 X. A
will get 50 units of good X against the export of 100 Y to B.

Correction subject 2C

Questions: (8)

1) According to international trade theories production possibility frontiers (PPFs) and consumption
possibility frontiers (CPFs) are always identical in autarky: Yes No
2) Unit costs structure of goods in countries is an implicit assumption of fixed technology in
comparative advantage theories: Yes No
3) Factors abundance of countries is one of the contribution of initial comparative advantage
theories: Yes No, it is rather one of the ECA model
4) International terms of trade are considered in the specialization resulting from comparative
advantage theories: Yes No

Exercise: (12)

Given the following information relating to production unit costs of 2 goods (X and Y) and the
remuneration of factors in 2 countries (A and B) :
Unit cost of production Labor (L) Capital (K)
Intensity of factors in Good X 10 5
Intensity of factors in Good Y 8 12
Remuneration of factors in Country A 1.5 (wA) 3 (kcA)
Remuneration of factors in Country B 2 (wB) 1.5 (kcB)

1) Say to which trade theory refers the table and give factors abundance of the countries (which
factor is abundant in which country ?)
The table referes to the ECA or HOS model. Given that abundant factors in countries have relatively lower
remuneration, one can say that labor (L) is abundant (1.5 against 3) in A and capital (K) is abundant (1.5
against 2) in B.

2) On the basis of comparative advantage theories (CA) determine the specialization of the
countries in goods X and Y
In order to apply the ECA principle, we need to compute domestic relative prices of goods in the 2
countries, based on the following price : P = w*L + kc*K.
Px = w*10 + kc*5 Py = w*8 + kc*12 Px/Py
Country A : PxA = 1.5*10 + 3*5 = 30 PyA = 1.5*8 + 3*12 = 48 (Px/py)A = 30/48 = 0.625
Country A : PxB = 2*10 + 1.5*5 = 27.5 PyB = 2*8 + 1.5*12 = 34 (Px/py)B = 27.5/34 = 0.809
(Px/Py)A = 0.625 < (Px/Py)B = 0.809. Therefore, A should specialize in the production of X and B in the
production of Y.

3) What is the viability condition of trade between these 2 countries in case of specialization ?
Trade is viable between the 2 countries if the ITOT belongs to the exclusive bracket of domestic relative
prices. In case of specialization trade will be viable if the ITOT belongs to the bracket ]0.625 0.808[.
Correction subject 2D

Questions: (8)

Answer briefly to the following questions:

1) Trade is costless exchange of goods and services between countries : Yes No

2) Give 3 relations between international financial development and trade : i) finance trade
operations, ii) finance FDIs for trade, iii) finance growth for trade, iv) receive/keep proceeds from
trade, v) expand trade possibilities by financial instruments, vi) finance innovations for trade.
3) FDIs always induce an increase in domestic investment: Yes No, FDIs may not support
domestic investment, the case of African countries
4) Absolute advantage and comparative advantage may lead to the same result in terms of
specialization of countries: Yes No

Exercise (12):

A/ Given the following table of production cost structure of 2 goods in 2 countries:

Countries Good X(p1) Good Y Domestic relative prices

(p2)

Country A 12 4 12/4 = 3

Country B 15 3 15/3 = 5

Comparative costs 12/15 = 0.8 4/3 =

1.33

1) Complete the table and give the specialization of countries in goods X and Y

Specialization of countries can be obtained comparing their domestic relative prices.

(Px/Py)A = 3 < (Px/Py)B = 5. Therefore, A should specialize in the production of X and B in the production
of Y.

2) Is trade between the 2 countries viable if the international term of trade (ITOT) is 3.5?

Trade is viable between the 2 countries if the ITOT belongs to the exclusive bracket of their domestic
relative prices. Here trade viable if the ITOT in in the bracket ]3 5[. The ITOT of 3.5 being in this bracket
one can say that trade is viable between the 2 countries.

3) Compute the gain from trade for each country at this ITOT.

Gain from trade in the countries is given by (ITOT - domestic relative price)/domestic relative price.
In country A : gain = (3.5 - 3)/3 = 0.1666 that is 16.67%. In country B : gain = (1/3.5 - 1/5)/(1/5) (in this
country X = 5 Y meaning that Y = 1/5 X). The gain is = 0.0857/0.2 = 0.4285 that is 42.85%. The 2 countries
are gaining from trade but country B is gaining more.