EC931 International Trade: Practice Paper PDF

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EC931 International Trade: Practice Paper...

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EC9310

UNIVERSITY OF WARWICK May Examinations 2019/20 International Trade

Time Allowed: 2 Hours. Answer TWO questions ONLY. All questions are of equal weight (50 marks each). Approved pocket calculators are allowed. Read carefully the instructions on the answer book provided and make sure that the particulars required are entered on each answer book. If you answer more questions than are required and do not indicate which answers should be ignored, we will mark the requisite number of answers in the order in which they appear in the answer book(s): answers beyond that number will not be considered.

1. (a) What is comparative advantage, and how can it give rise to trade flows? (20 marks) (b) If trade is driven by comparative advantage, can trade patterns be predicted on the basis of autarky price differentials? Explain. (20 marks) (c) Can the theory of comparative advantage help explain the trade patterns we observe for developed economies? Explain. (10 marks)

2. (a) With reference to the case of a small open economy, what are the welfare effects of an import tariff? (20 marks) (b) How can trade policy cooperation be sustained in the absence of a binding coordination mechanism? (20 marks) (c) Does country size matter in this respect? Explain. (10 marks)

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3. (a) What are the main predictions of a “reciprocal dumping” model of trade between two identical countries, where output in one sector is produced by a single producer in each country at a constant marginal and average cost? Explain. (25 marks) (b) Does free trade always Pareto dominate autarky on welfare grounds in this model? Explain. (15 marks) (c) Would your answer change if the two countries were not identical? Explain. (10 marks)

4. (a) Discuss how, in the presence of increasing returns to scale and product differentiation, trade can arise between similar countries and generate gains for consumers through rationalisation effects and variety effects. (20 marks) (b) Describe the ”gravity equation” representation of international trade flows, and explain its origins and predictions. (20 marks) (c) How can the gravity equation be used in empirical analysis? Explain. (10 marks)

5. (a) If trade barriers are selected by majority voting, how does the distribution of factor endowments affect policy choices? Explain. (20 marks) (b) Would your answer to part (a) change if policy choices were made in response to lobbying by interest groups? Explain. (20 marks) (c) Should we expect the interests of consumers and those of producers to carry equal weight in trade policy formation? Explain. (10 marks)

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