ECON 5006: International Trade Theory and Policy

Subject ECON 5006: International Trade Theory and Policy

The assessment has five questions in total.

The first four questions are true, false or uncertain statements; where you need to provide an answer and justify this answer. You need to answer all these questions. The maximum word limit for these four questions is strictly 250 words each. These questions are worth 15 marks each.

The remaining question is an essay question. The maximum word limit for this question is strictly 1000 words. This question is worth 40 marks.

You are allowed to handwrite mathematical solutions and draw diagrams were relevant and insert these as scanned pictures in your answers. Everything else should be typed. Word documents and PDFs are both acceptable.

Question 1: The statement refers to the Ricardian model of trade. If countries export the good in which they have a comparative advantage, they will gain from trade.

Question 2: Statement refers to the Neoclassical model of trade. In order to gain from trade, a country must produce where marginal rate of substitution is equal to the marginal rate of transformation.

Question 3: The statement refers to the specific factors model of trade. Unambiguous changes in output of both goods will result from any factor’s endowment change.

Question 4: Statement refers to the partial equilibrium model of monopoly and oligopoly. In an industry with a single domestic producer of a good, consumer welfare after opening to trade under Cournot competition would depend on the firm’s engaging in reciprocal trade.

Question 5: Consider a model with two countries, two goods and two factors of production (labour and capital), where capital initially cannot move between industries, and countries are under autarky. Discuss how return to each factor changes as the countries open to trade. Now assume that rigidities in the capital markets disappear, and capital becomes mobile across industries.

Discuss how return to each factor changes. Explain who would have an incentive to lobby for protection initially, and whether that would change.