Fakultät III Wirtschaftswissenschaften Univ.-Prof. Dr. Jan Franke-Viebach

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1 Exam WS 03-4: International Trade ( nd Exam Period) Universität Siegen Fakultät III Wirtschatswissenschaten Univ.-Pro. Dr. Jan Franke-Viebach Exam International Trade Winter Semester 03-4 ( nd Exam Period) Available time: 60 minutes Solution For your attention:. The exam is made u o 9 ages (including this cover age). Please check and see i the exam you are holding is comlete.. For your answers, use the designated saces. Should these not suice, use the backside o the ages. Answers written in encil will not be scored. 3. Additional materials you may use or the exam: a non-rogrammable calculator. (Smart hones and mobile hones are not allowed!) 4. ATTENTION: The names or variables have the same meaning as in the lecture. Insoar as you also use the same symbols or the variables as we did in the lecture you will not have to deine these any urther. Question 3 4 Sum Mark Points achievable Points achieved C:/ Intern Trade / WS 3-4 T Solution

2 Exam WS 03-4: International Trade ( nd Exam Period) Problem : Gravity Model We want to understand the ollowing equation, called the gravity equation : T i j = Y i D i j Y j a) Basic message o the equation: a The equation tries to exlain the variable T ij. What is meant by this variable? [ oints] Volume o trade between countries i and j (0.5) () (0.5) a What do the variables Y i and D mean? [4 oints] Y i : economic size o country i (0.5) () (0.5) D: distance between countries i and j () () C:/ Intern Trade / WS 3-4 T Solution

3 3 Exam WS 03-4: International Trade ( nd Exam Period) b) We want to exlain why D and Y i are imortant or the exlanation o T ij. b Please determine the imact o D on T ij by calculating the irst-order derivatives o T ij with resect to D, including the sign o this derivative (0 or >0). [3 oints] Tij D = (0.5) (0.5) (0.5) () Yi D (0.5) Yj 0 b Please careully exlain the imact o D on T ij. Please do so in the ollowing way: A high value o D [3 oints] a high value o D imlies - high transort costs and high costs o ersonal contacts () () - and thus reduces trade () C:/ Intern Trade / WS 3-4 T Solution

4 4 Exam WS 03-4: International Trade ( nd Exam Period) Problem : Heckscher-Ohlin Model Consider the Heckscher-Ohlin model. The domestic economy (Home) is the labourabundant country, good is the caital-intensive good. In autarky, the domestic oortunity costs o good will be lower than abroad. Accordingly, the domestic rice ratio in autarky ( / ) will be lower than abroad: d X dx MRT d X d X MRT U to the resent, Home has been in autarky; it now oens or international trade. a) What condition must an international rice ratio ( / ) W ulil such that trade is beneicial or both countries? [ oints] W () () b) Which good does Home imort? [ oints] good () C:/ Intern Trade / WS 3-4 T Solution

5 5 Exam WS 03-4: International Trade ( nd Exam Period) c) Assume that the suly o labour in the domestic economy alls. c In the ollowing grah, lease indicate how the transormation curve changes. [5 oints] X 0 X X Reduction o X : () 0 X Reduction o X : () reduction o X stronger than o X : () c How does the decrease o the domestic labour suly aect domestic exorts and imorts? [4 oints] Exorts all () Imorts all () C:/ Intern Trade / WS 3-4 T Solution

6 6 Exam WS 03-4: International Trade ( nd Exam Period) Problem 3: General Equilibrium Analysis when there is a Monooly in the Food Sector We consider a two-sector economy: - in the sector o manuactured goods (m), there is erect cometition - in the sector o ood (), there is only one roducer - both sectors use caital and labour inuts. We assume that actor markets are erectly cometitive. Factor rices thereore are given or any single market articiant. Consumers maximize utility while roducers maximize roit. We want to analyze the economy with the hel o the ollowing grah. X Ot Mon 0 X m a) Point Mon describes the autarky equilibrium. a Why is the rice line in Mon latter than the transormation curve: MRT m d X d X? [4 oints] m C:/ Intern Trade / WS 3-4 T Solution

7 7 Exam WS 03-4: International Trade ( nd Exam Period) the roducer o ood charges a rice above marginal cost () () () () a How must we modiy the model so that the autarky equilibrium is in oint Ot? [.5 oints] Perect cometition (or: many roducers) in the ood sector (0.5) () () (or: subsidize ood) b) Now the economy oens or trade. The oreign country has the same eatures as the domestic one; most o all, there is a monooly in the ood sector. In the above grah, lease draw the equilibrium oint with trade (oint Duo). In oint Duo, lease also draw the rice line and the indierence curve. [5 oints] Point Duo correct: Price line in Duo: - latter than in Mon: - steeer than transorm. curve: Indi. curve in Duo tangent to rice line: X Ot Duo Mon 0 X m C:/ Intern Trade / WS 3-4 T Solution

8 8 Exam WS 03-4: International Trade ( nd Exam Period) Problem 4: Trade with External Scale Economies We consider an economy with external scale economies within sector. The roduction unction o an individual comany i o that sector is: X ß i i = N X, 0 ß. a) Please calculate the marginal roductivity o labor or comany i. Please indicate the two comonents o marginal roductivity: a comonent that the individual comany takes into account ( erceived comonent ) and a comonent that it does not take into account ( neglected comonent ). [7 oints] d X dn i i = () () () () () ß ß d X X + ß X N i dn i erceived neglected () () b) For the rice ratio in autarky ( / ) a and or the marginal rate o transormation we ind: d X d X MRT = X ß ß, a = X ß. b Please comare the marginal rate o transormation and the rice ratio and interret the dierence between the two. [4.5 oints] - marginal rate exceeds the rice ratio () - social oortunity costs o good are higher than the rice ratio indicates C:/ Intern Trade / WS 3-4 T Solution

9 9 Exam WS 03-4: International Trade ( nd Exam Period) () (0.5) () () or: as roducers in sector one are not aid or the external scale economies, the rice they charge in the market is too high (3.5) or: as roducers in sector one do not take into account the external sill over o their roduction, they underestimate their marginal labor roductivity, overestimate marginal costs and thereore charge a rice that is too high (3.5) b In the ollowing grah, oint A reresents the situation in autarky. Please draw the corresonding rice line as well as the indierence curve. [4 oints] C, X A 0 C, X C, X - Price line in A latter than transormation curve : 3 - indi. curve tangent to rice line in A: A 0 C, X C:/ Intern Trade / WS 3-4 T Solution

10 0 Exam WS 03-4: International Trade ( nd Exam Period) c) In the world market, the rice ratio exceeds that o the economy under consideration (which we assume to be small): W > a c In the above grah, lease indicate the new roduction oint as B. [ oints] C, X Price line in B: Price line steeer than in autarky: Point C () on rice line: C A B 0 () C, X c In the above grah, lease draw the rice line that is now relevant as the consumers budget line. Indicate the new consumtion oint as C. [6 oints]. C:/ Intern Trade / WS 3-4 T Solution