ECON 475v6 Assignment 1D

Read the requirements for each question and plan your responses carefully. Provide
complete answers for all five questions with calculations where necessary. Although your
responses should be concise, ensure that you answer all portions of each question
completely.
Answer all ten questions in one file. Each question is worth 20 marks. Keep your answer
concise. Use figures to illustrate your point wherever possible. Show all your work and
attach your graphs when submitting your assignment for grading and feedback.
each question 150-250 words
1. If demand for a countrys export good rises, other things being equal,
will both the commodity terms of trade and the income terms of trade
improve? Explain.
2. Define and explain the difference between absolute advantage and
comparative advantage. What is the significance of each in
international trade process?
3. Suppose that the price of labour rises. Explain how producers would
respond, using the isocost/isoquant framework. What would happen to
the capital/labour ratio?
4. Suppose that, with a given unit of labour, India can produce 40
basketball hoops or 60 basketballs and Nepal can produce 10 basketball
hoops or 30 basketballs. This scenario is illustrated below:

India
Nepal

output
hoops (H) balls (B)
40
60
10

30

a. Explain absolute and comparative advantage for India and Nepal.

b. If each country has 1000 person-days of labour, construct each
countrys production-possibility curves.
c. If Nepal wants to consume equal amounts of both goods (as many units of
hoops as balls), how much of each good will be produced and consumed if
there is no trade between the two countries?
d. Assume that the equilibrium terms of trade are 1H=2B. If Nepal still wants to
consume equal amounts of both hoops and balls, show its points of
production, consumption, and the amounts of exports and imports.
e. Show the gains from trade for Nepal.
5. In light of the Ricardian model, how might you evaluate the claim by
developing countries that they are at a disadvantage in trade with
powerful industrialized nations?
6. Suppose the free trade market price of a car is $20,000. It contains
$10,000 worth of steel. The importing country imposes 25% tariff on
car imports.

ECON475v6

Assignment 1D

June 11, 2013

a. Calculate the effective rate of protection if there is no duty on steel imports.

b. Calculate the effective rate of protection if the importing country imposes a 20%
tariff on steel imports.
c. Suppose it also takes $4000 worth of copper (besides $10,000 worth of steel)
to produce a car. Calculate the effective rate of protection if there is no import
tariff on the imports of either steel or copper.
d. Suppose there is import duty of 20% and 15% on imports of steel and
copper, respectively. Calculate the effective tariff rate.
7. Explain how the Krugman model of trade works. Explain the
similarities and differences between the Krugman model and
Heckscher-Ohlin model.
8. Explain the difference between the price and the physical definitions
of factor abundance. When could they give conflicting answers
about which factor is the abundant factor?
9. Illustrate how the Linder theory of trade works. Explain similarities
and/or differences between the Linder model and Heckscher-Ohlin model.

10. Using a general equilibrium approach, point out the real income loss from
a tariff to a country. What is the consumer welfare loss? Why might
consumers prefer a production subsidy rather than a tariff?

ECON475v6

Assignment 1D

June 11, 2013