Question

1. On one set of axes, draw a single concave production frontier with two different community indifference curves tangent to the single production frontier, on the assumption that two nations are identical in production but have different tastes. Indicate on your figure the autarky equilibrium-relative commodity price in each nation and show the process of specialization in production and mutually beneficial trade. 2. Answer the following questions: (a) What does the factor-price equalization theorem postulate? (b) What does the Stopler-Samuelson theorem postulate? (c) What is the Leontief paradox? How was the paradox resolved or explained? (d) How do different environmental standards affect industry location and international trade? 3. Figure 4.3 shows how transportation costs reduce the volume of trade. It shows what happens to the production and the consumption of X in two nations under (1) autarky, (2) trade with no transportation costs, (3) trade with transportation costs of $2 per unit. Find the consumption, production, prices, exports and imports in two nations when transportation cost is $4 per unit. 4. Suppose that the small nation in page 12 of the lecture slide imposed a 100% ad valorem tariff instead of a 50%. The international price of is $20. The supply and demand curves are as following: Q d = 100 − P Q s = P (a) Find the level of consumption, production, imports, and tariff revenue of commodity X. (b) Find the consumption, production, trade, and revenue effects of the tariff (for example, the difference between the consumption level in free trade and the level after the imposition of the tariff) 5. Read the attached article “The Prize in Economic Sciences 2008” and briefly explain (1) the difference between “traditional theory of international trade” and “new theory of international trade”, and (2) the contribution of Paul Krugman to economic geography

Answer 1

Ans 1. see page:

Ans 2.(a)Factor equalization price theorem states International trade will bring about equalization in the relative and absolute returns to homogeneous factors across nations. As such, international trade is a substitute for the international mobility of factors like labour. it means that wage rate of labours and rent of homogeneous capital will become equal due to trade.

(b) The Stolper-Samuelson Theorem argues that free trade benefits the factor of production that is relatively abundant and harms the locally scarce factor regardless of industry in which it is employed. As country specialize in factor abundant product and trade it providing greater benefits to factor of production which is abundant.

(c) Leontif study resulted in paradox as US was high on ranking of capital output ratio but still it exported more of labour intensive commodities after 25 years of world war 2. It was resolved that labour intensive product exports were highly skilled labour and technology intensive which was abundant in US.

(d)lower environmental standards in nation can in effect use the environment as as a factor of production in attracting polluting firms from abroad and achieving a comparative advantage in polluting goods and services but it does not reflect social cost. It has been found by world bank that poor developing countries export environmental polluting good but due to development they later invest in cleaner technology.

3) Figure is not here, 4)page 12 of the lecture slide is not here and in question 5 , there is no attached article