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Feb, 2012 term_test.docx

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Shalini Sharma

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ECO 364- International Trade Theory Mid-term I Feb 9, 2012 Duration: One hour 30 minutes Instructions: Answer ALL THREE of the following questions. Only simple non-graphing calculators are allowed. Answers must be written in pen. Diagrams can be drawn in pencil. Please keep your responses brief and to the point. GOOD LUCK!!! [Total Worth- 30. All questions equally weighted] 1) Consider an economy, call it Home. Home can produce two goods X and Y, where each must be produced using some capital and labor (just like we’ve discussed in class). Unit factor requirements are as follow: X Y aL= 3 and a =L2 a K 1and a =K3 Home has a total factor supply of 80 units of labour and 120 units of capital . a) Find the production pattern for Home and show your answer on the Edgeworth box for the two sectors, X and Y. What do you notice from you Edgeworth box about production patterns? b) Let capital supply drop 85 units. What is the effect of this change on the production pattern for Home? c) What can you conclude about production pattern (whether diversified or specialized) with reference to your responses in a) and b). What does the production pattern depend on? d) What if instead, capital rose from 120 units to 140 units of capital. What is likely to occur in Home at the current (original) wage rental (w/r) ratio? 2) Free Trade always makes all participating countries better off than if those countries did not trade at all. Show using the Hecksher –Ohlin framework whether the above statement is always true or not.  First show or discuss those conditions under which gains from trade will always occur for all participating countries under the H-O theorm.  Second show or discuss those conditions under which gains from trade may not occur for all participating countries under the H-O theorm. Hint: Assume that there are two participating trading countries, producing two goods X and Y…. etc. and then show/discuss.
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