final exams for RMIT PDF

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FINAL ASSESSMENT FOR ECON1086 INTERNATIONAL TRADE This assessment has a total of 50 marks. There are three questions in the following three pages (including this page). Answer all three questions and follow the instructions carefully. Explain your answers concisely and in a clear way. You can write your answers using a new word document. If you are asked to draw a figure or provide a mathematical expression, you may write it down on a paper by hand, take a photo of it, convert it to pdf and attach to the main document containing your answers. Question 1 (20 marks) Consider the following Ricardian model of trade between Home and Foreign. Assume throughout that those two countries are the only two countries in the world, at least for purposes of trade. There are two goods: Necklace and Purse. Consumers in both countries always spend one-third of their income on Necklaces and two-thirds of their income on Purses. The only factor of production is worker. Each Home-country worker can produce 2 Necklaces or 2 Purses per unit of time. Each Foreign-country worker can produce 3 Necklaces or 1 Purse per unit of time. There are 60 workers in Home and 30 workers in Foreign. REQUIRED. Answer parts from (a) to (i) based on the above information. (a) Which country has an absolute advantage in producing Necklaces? In Purses? (2 marks) (b) Which country has a comparative advantage in producing Necklaces? In Purses? (2 marks) (c) Find the autarky relative price of Purse in both countries (i.e., the price of Purse divided by the price of Necklace). (2 marks) (d) Under autarky, how many units of each good that each country consumes? (2 marks) (e) Mathematically derive the relative demand curve relating the relative demand for Purse to the relative price of Purse. Next, show what the curve looks like in a diagram (put the relative price of Purse on the vertical axis and the relative quantity of Purse on the horizontal axis). (3 marks) (f) Draw the world relative supply curve of Purse including all relevant numbers (put the relative price of Purse on the vertical axis and the relative quantity of Purse (3 marks) on the horizontal axis). (g) Under free trade, determine the equilibrium relative price of Purse and the equilibrium relative quantity of Purse. (2 marks) (h) Under free trade, how many units of each good that each country produces? (2 marks) (i) Under free trade, how many units of each good that each country consumes? (2 marks) 1 

Question 2 (16 marks) Assume that we are in the world of a two-factor, two-good and two-country model of Heckscher-Ohlin. The two countries are Home and Foreign and the two goods produced in these countries are corns and tapes. There are also two factors, namely, skilled and unskilled workers, each of which can be used in the production of either good. Denote by ws and wu as the wage of skilled and unskilled workers, respectively. Assume that Home is skilledlabour abundant whereas Foreign is unskilled-labour abundant. Let PC and PT represent the prices of corns and tapes, respectively. Assume that under autarky, we have 

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Moreover, assume that there is some degree of substitutability in production between skilled and unskilled labour. REQUIRED. Answer parts from (a) to (e) based on the above information. (a) Based on the information above, which good is skilled-labour intensive and which good is unskilled-labour intensive? (2 marks) (b) If there is free trade between Home and Foreign countries, what will be the trade pattern, i.e., which country exports and imports which good? (2 marks) (c) With free trade, what will happen to production of corns and tapes (increase or decrease) in each country? (4 marks) (d) With free trade, explain what will happen to skilled-unskilled wage ratio, (ws/wu), in each country as well as skilled-unskilled worker use in each industry in each country? (4 marks) (e) Determine which factor owners will support free trade in each country and which factor owners will oppose to free trade in each country? (4 marks)

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Question 3 (14 marks) Consider Motherland, which is a large country in the world. Motherland exports ‘freezers’ to the rest of the world. The government of Motherland is considering to help its freezer exporters by providing them a per unit export subsidy. Further, Motherland is the only country in the world considering helping its domestic firms. Assume that Motherland is seeking your expert opinion as an economist for the use of this export subsidy regarding its effects on the overall welfare of Motherland. REQUIRED. Answer parts from (a) to (b) based on the above information. (a) All else equal, what would your recommendation be if the market structure of the freezer market is Perfect Competition everywhere in the world? Clearly explain your answer with no more than 500 words. (7 marks) (b) All else equal, what would your recommendation be if the market structure of the freezer market is Cournot Competition everywhere in the world? Clearly explain your answer with no more than 500 words. (7 marks)

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