ECOS3006 International Trade
Mid-semester Exam
Semester 2, 2023
1. You want to evaluate the degree of international integration for a certain country. The
most appropriate measure will be this country’s
⃝ total volume of imports
⃝ total volume of exports
⃝ trade to GDP ratio
⃝ trade balance
2. In the Ricardian framework with two countries, which of the following statements always
applies?
⃝ A country has comparative advantage in one good
⃝ The world price is different from the two autarky prices
⃝ An exporting country’s supply curve intersects the downward sloping portion of
the importing country’s demand curve
⃝ Compared to autarky, no country is worse off
3. Consider an open, trading economy with two sectors: agriculture and production of cars.
There are two factors used in the production of both industries: labor, mobile between the
industries, land specific to agricultural production and capital specific to the production of
cars. Workers spend most of their earnings on agricultural products.
Formation of free trade area led the decrease in the prices of both goods by 5%. Which
one of these observations will apply?
⃝ The manufacturing sector now uses relatively more labor.
⃝ Labor force allocation remains the same.
⃝ The labor/capital ratio increases in both sectors.
⃝ None of the other three options are correct.
4. The Heckscher-Ohlin theorem predicts that when a capital-abundant country opens to
trade
⃝ Capital owners and workers will be better off
⃝ The real wage in this country will increase
⃝ This country will import labor-intensive good
⃝ Relative factor prices will not change
5. Gains from trade in the model of monopolistic competition are driven by
1
⃝ differences in technology
⃝ higher variety and scale effects
⃝ scale effects
⃝ higher variety
6. Consider countries A, B, and Cc. The distance between A and B is 1600 kilometers and
between A and C, it is 700 kilometers. Country A’s GDP is approximately equal to $6
trillion, country B $5 trillion, and country C $2 trillion. Use the gravity equation and
compute the ratio of the expected volume of trade between A and C over the expected
volume of trade between A and B. Assume that the distance elasticity is equal to 1.5.
⃝ 0.93
⃝ 3.32
⃝ 1.38
⃝ 1.31
7. Heckscher-Ohlin model predicts that the long run effect of a surge in FDI into China leads
to
⃝ no change to the rental rates in China
⃝ a decrease in rental rates in China
⃝ a decrease in wages in China
⃝ an increase in rental rates in China
8. Italy produces agricultural products and manufactured products, using both labour and
capital. Manufacturing is capital-intensive while agriculture is labour-intensive. When
Italy engages in free trade, it starts exporting manufactured products. In the long run,
which one of the following scenarios is correct?
⃝ Real wage in Italy falls.
⃝ Real rental in the manufacturing industry increases more than the real rental in
the agricultural industry.
⃝ Italy becomes more capital-abundant.
⃝ Allocation of Italian capital between sectors remains unchanged compared to
autarky.
9. Consider a framework with two countries, two goods, and two input factors (labour and
capital), The table shows the share of effective labour and share of GDP for these two
countries. Which one of the following is correct?
Share of world effective labour Share of world GDP
Country A 60% 70%
Country B 40% 30%
⃝ Country B exports the labour-intensive good at the trade equilibrium
⃝ Country A is labour abundant.
⃝ Country A has a larger population
⃝ Country B has better technology
2
10. Suppose Vietnam produces only clothing and rice. Labour input is needed for both goods.
The clothing industry requires capital, while the rice industry requires land for production.
1. Draw the appropriate diagram for this scenario. Carefully label everything on your
diagram. And explain in a sentence or two why you chose this model or diagram. (3
points)
2. Vietnam experiences an increase in the relative price of clothing. What happens to the
allocation of the labour force in Vietnam? And what happens to an average worker’s
nominal and real wage? Describe in words. Modify and label your diagram from part
1) accordingly. (5 points)
3. In Vietnam, who benefit and who lose from trade (an increase in relative price of
computers)? Answer the question by concluding on whether each of the three groups
– capital owners, land owners, and workers, gain or lose from trade. Support your
answer with some brief explanations. (4 points)
3
11. Consider two countries, Germany and France, and two goods, cars and wine. Labour is the
only input factor used. The table below presents the marginal products of labour in both
countries and industries.
Car Wine
Germany 60 80
Italy 60 50
Suppose at the trade equilibrium, the relative price of wine is 0.75.
1. Determine and explain which country has the absolute advantage in wine production.
Calculate the autarky relative prices of wine in these two countries. (2 points)
2. Determine the type of goods produced in each country. Explain with reference to
opportunity cost and the comparative advantage. (5 points)
3. Draw the export supply and import demand diagram of wine. Carefully label every-
thing on your diagram. (3 points)
4. Quantify the gains from trade for Italy. [Hint: calculate and compare the real wage
in terms of the imported good before and after opening to trade.] (4 points)