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ECON3034 International Trade
Duration: 24 HOURS:
This paper contains 4 questions
- Answer ALL 4 out of 4 questions.
- An outline marking scheme is shown in brackets to the right of each question.
- Explain concisely all steps you undertake to answer the questions. Please write
clearly, only readable parts will be taken into account.
- This is an open book assignment. You may use notes, books, online resources or
software (e.g. Excel) when answering these questions. You must always use
your own words and calculations and you may not communicate to others or
get help from any person be it private or online.
- Once you have finished, you should upload your answers as a single pdf file on the
Final Assessment section of the ECON3034 Blackboard site. A submission is
only complete with a submission number.
- The submission deadline is 10:00 am on May 25th. Your work must be up-
loaded onto the Blackboard website before this deadline.
- See blackboard for detailed submission instructions.
- Submission of this work acknowledges that you have answered the questions in-
dividually and in accordance with University guidance on Academic Integrity.
Page 1 of 4
2 ECON3034W1
1 Using Heckscher-Ohlin theory and the following table on relative
factor abundance, what is the predicted impact of China’s accession
to the WTO 1999 on its trade with the US (i.e. which type of
goods will be traded and in which direction)? Please explain (no
computations needed) your answer (cite the appropriate theorem(s)
and give examples) using not more than 300 words. [20]
Approximate share of country factor endowment
of world factor endowments, early 2000s
High- Medium-
Physical Skilled Skilled Unskilled Arable
Capital Labour Labour Labour Land
USA 26 30 8 1 17
China 5 12 31 25 14
2 Suppose a limited number of WTO member countries consider en-
tering a customs union with zero tariffs within the union and com-
mon tariffs on imports from countries outside of the union. What will
be the consequence for aggregate trade and welfare in the world in-
crease or decrease? Explain two different effects of the new customs
union using the gravity model and not more than 300 words. [20]
3 ECON3034W1
3 Suppose there are two countries, Home and Foreign, and two goods,
clothes and grain, both produced only using labour. Unit labour
costs are constant and given by aHc = 1 and a
H
g = 2 in Home, and
aFc = 3/2 and a
F
g = 3/2 in Foreign, where subscript c stands for
clothes and g for grain. Both countries have the same labour force
L. There is free international trade of goods at prices pc and pg,
and demand for good i = c, g in country j = H,F is given by
xji = Y
j/(2pi), where Y
j denotes the aggregate income in country
j.
In the free trade world market equilibrium pc = 1 and pg = 3/2.
a) Determine the production and imports and exports in each coun-
try. [10]
b) Home considers introducing a trade tariff τ on grain. The rev-
enue from the tariff is to be redistributed equally among con-
sumers in Home. Determine the qualitative effect on trade of a
small tariff τ (so that new equilibrium prices will be close to the
old ones). [10]
c) Now Home considers a quota on grain imports instead of a tariff,
to protect the domestic grain producers. Determine the qualita-
tive effect of an import quota qg < L/3 on grain on the prices
for grain and labour in Home. Will the quota increase welfare
in Home? [10]
Page 3 of 4
4 ECON3034W1
4 Suppose the market for fridges in Home is characterised by monop-
olistic competition. All firms face the same technology: a marginal
cost of b < 1/2 per fridge, and a fixed cost K. Suppose that per
capita demand for firm i’s fridges is given by
ci = w/p
2
i ,
where w is the wage and pi the price for firm i’s variety. The
aggregate demand for i’s fridges in the economy is therefore yDi =
Lw/p2i . Firms act as price setters. Normalise the wage to w = 1.
a) Derive the optimal price a firm will set as a function of b, and
show that the per capita demand for firm i’s fridges is c∗i =
K/(Lb). [10]
b) Home now introduces free trade in fridges with another country
with the same technology and the same size L. What will Home
export and import? How will consumer welfare in Home change?
Explain (no computations needed). [10]
c) Identify a property or assumption of this model that is both
at odds with empirical facts and affects welfare implications.
Explain briefly and suggest an extension. [10]