Question

1.) The US is relatively capital abundant, and India is relatively labor abundant. Assume that the production of rice is more labor intensive than the production of cars. Suppose there are foreign direct investment (FDI) flows from the US to India,and the FDI is in the car industry. Answer the following questions.

a.Explain short-run and long-run effects of the FDI on India's pattern of production, imports and exports.

b.How will you answer in Part (a) change if the FDI from the US to India is in the rice industry? Explain your reasoning.

2.) Starting from the long-run equilibrium without trade in the monopolistic competition model with 10 firms in Home country. Consider what happens when Home begins trading with four other identical countries. Assume that all countries have the same population, and their consumers have identical preferences.

a.Compared with the no-trade equilibrium, how much does industry demand D increase? How much does the number of firms (or product varieties) increase? Explain your reasoning.

b.Does the new firm-level demand curve (d’) shift or pivot due to the opening of trade? Display a figure and explain your reasoning.Compare your answer with the case in which Home trades with only one other identical country.Which case has a more elastic new demand curve d’?

c.How will your answer in Part (a) change if one of the three countries is larger than the other two countries?

Answer 1

1.

(a)The FDI inflows ,especially for developing countries like India ,bring about economic growth. Inflow of FDI from US in the car industry will bring about innovation and advanced technology to India.India;s pattern of production changes due to availability of capital and technology transfer.It in turn increases the export capability of India and rise in exports.They provide more funds for domestic investments.which in turn increase the level of employment,advances technology and generation of income.And higher the income levels imports also increase.

(b) The FDI inflows in favour of rice too will produce dramatic impact over the agricultural sector due to technological tranfers and innovative methods at least in the short run.The pattern of production will change in favour of capital intensive production technology and there will be multiple increase in production and quality which in turn will increase exports which might bring about an increasein the exchange rate of Indian currency and the imports will get cheaper and so expand.