INTERNATIONAL ECONOMIC RELATIONS
(13ECB005)
Summer 2014 3 Hours
Answer THREE questions including at least one question from Section A, and at least one
question from Section B. The third question can be from either section.
Answer all parts of a question. All questions carry equal marks.
Any approved University calculator is permitted.
SECTION A
1. (a) The USA contains a higher ratio of capital to labour than the rest of the world
(RoW). Provide diagrammatic and intuitive explanations of the predictions of the
Heckscher-Ohlin-Samuelson model concerning the effect on production levels in
the USA of free trade with RoW. (60 marks)
(b) Evaluate the empirical performance of the Heckscher-Ohlin-Samuelson model in
the light of the Leontief Paradox. (40 marks)
2. “If a country is large enough in world markets, its gain from import protection might well
outweigh other countries’ losses.” Evaluate this claim using appropriate diagrammatic
analysis. (100 marks)
3. Richland and Poorland have identical labour forces and technologies, and they both
produce a single good under conditions of perfect competition. Richland’s capital stock
is significantly larger than Poorland’s.
(a) Use an appropriate diagram to analyse how capital mobility (FDI flows) between
Richland and Poorland will affect the distribution of income in the two countries.
Within each country, who will tend to support, and who will tend to oppose, free
capital movements? (70 marks)
(b) Now assume that both countries produce two goods and that goods trade is
liberalised instead of capital movements. (The goods are produced with different
capital/labour ratios.) How would you expect the liberalisation of goods trade to
affect the distribution of income within the two countries, and how does your
answer compare to that you gave for part (a)? (30 marks)
SECTION B
4. During the recent crisis in 2008-2009 we observed a big dip in world trade relative to
world GDP. Explain how financial factors in relation to exporting might explain this
empirical pattern. What does the evidence tell us about relationship between finance
and the trade dip? [100 marks]
5. Using appropriate diagrams, show how forming a preferential trade area might lead to
trade diversion and/or trade creation. [100 marks]
6. Show that if countries apply the principle of reciprocity in trade negotiation, welfare
increases. Explain the intuition behind the diagram. [100 marks]
BE FERRETT
A HOEFELE
Page 1 of 1
(13ECB005)
Summer 2014 3 Hours
Answer THREE questions including at least one question from Section A, and at least one
question from Section B. The third question can be from either section.
Answer all parts of a question. All questions carry equal marks.
Any approved University calculator is permitted.
SECTION A
1. (a) The USA contains a higher ratio of capital to labour than the rest of the world
(RoW). Provide diagrammatic and intuitive explanations of the predictions of the
Heckscher-Ohlin-Samuelson model concerning the effect on production levels in
the USA of free trade with RoW. (60 marks)
(b) Evaluate the empirical performance of the Heckscher-Ohlin-Samuelson model in
the light of the Leontief Paradox. (40 marks)
2. “If a country is large enough in world markets, its gain from import protection might well
outweigh other countries’ losses.” Evaluate this claim using appropriate diagrammatic
analysis. (100 marks)
3. Richland and Poorland have identical labour forces and technologies, and they both
produce a single good under conditions of perfect competition. Richland’s capital stock
is significantly larger than Poorland’s.
(a) Use an appropriate diagram to analyse how capital mobility (FDI flows) between
Richland and Poorland will affect the distribution of income in the two countries.
Within each country, who will tend to support, and who will tend to oppose, free
capital movements? (70 marks)
(b) Now assume that both countries produce two goods and that goods trade is
liberalised instead of capital movements. (The goods are produced with different
capital/labour ratios.) How would you expect the liberalisation of goods trade to
affect the distribution of income within the two countries, and how does your
answer compare to that you gave for part (a)? (30 marks)
SECTION B
4. During the recent crisis in 2008-2009 we observed a big dip in world trade relative to
world GDP. Explain how financial factors in relation to exporting might explain this
empirical pattern. What does the evidence tell us about relationship between finance
and the trade dip? [100 marks]
5. Using appropriate diagrams, show how forming a preferential trade area might lead to
trade diversion and/or trade creation. [100 marks]
6. Show that if countries apply the principle of reciprocity in trade negotiation, welfare
increases. Explain the intuition behind the diagram. [100 marks]
BE FERRETT
A HOEFELE
Page 1 of 1
