Examination: Internationaler Handel (International Trade)
Summer Term 2002
Examiner: Ludwig v. Auer
The following aids may be used: Calculator
This examination comprises three questions. The available amount of time is two hours.
Question 1:
Consider the Ricardo-Model with two countries (Home and Foreign) and four goods. The
unit labour requirements of the four goods are listed in the following table:
good
Home’s unit labour requ. Foreign’s unit labour requ.
manufactures (M)
aM = 8
a∗M = 10
food (F)
aF = 1
a∗F = 4
cloth (C)
aC = 2
a∗C = 4
toys (T)
aT = 1
a∗T = 3
a) (4 points) What is the interpretation of the labour unit requirement aC = 2? Suppose
the wage in Home is w and in Foreign w∗ . Under which condition is cloth produced
only in Home, under which condition only in Foreign, and under which condition in both
countries.
b) (16 points) Suppose that the number of workers in Home and in Foreign is identical and
constant, that is, independent of the wage. In a suitable diagram draw a relative labour
supply curve RS which is consistent with these assumptions. The curve should depict
the countries’ relative labour supply as a function of the relative wage w/w∗ . Also draw a
relative labour demand curve which is consistent with the unit labour requirements listed
in the table and which gives for a relative wage of w/w∗ = 2 a relative labour demand of
1. Explain verbally the shape of your RD-curve.
c) (6 points) Consider again your graphic solution to question 1b). Which country produces
which good? What pattern of trade emerges?
d) (4 points) Looking at the labour unit requirements, one can see that in all goods Foreign
has an absolute disadvantage. How does Foreign compensate this problems?
e) (10 points) Suppose that there are transportation costs of 50% of the respective labour
unit requirement. For example, the labour unit requirement of cloth is 2; if this piece
of cloth is exported, then the coefficient is 3. Using the labour unit requirements listed
in the table, examine for which goods the incentive for trade vanishes as a result of the
additional transportation costs. For deriving your answer, assume that the relative wage
is w/w∗ = 2.
Question 2:
Consider the Standard Trade Model with two countries (Home and Foreign) and two goods
(Manufactures and Food). The world market prices of these goods are PM and PF .
a) (7 points) For Home, draw the usual production possibility frontier (that is, with decreasing
marginal products), with Food on the horizontal axis. For given prices PM and PF ,
also draw an isovalue line which determines the efficient output point of Home. Derive
algebraically the slope of this isovalue line.
b) (8 points) In your diagram, add also some indifference curves, such that, given your isovalue
line is valid, Home would be a food exporter. In your example, which quantities would
be produced, consumed, imported, and exported? Where in your diagram can you read
off the terms of trade of Home?
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c) (4 points) Suppose that the relative price PF /PM rises. Illustrate in your diagram the effects
on the quantities that would be produced, consumed, imported, and exported.
d) (5 points) Transfer the results of questions 2b) and 2c) in a new diagram which shows for
Home the relative supply curve RS and the relative demand curve RD as a function of
the relative price PF /PM . Also for Foreign such curves exist (RS ∗ and RD∗ ). Add these
curves in your diagram, such that for both countries an incentive exists to trade food
(from Home) for manufactures (from Foreign).
e) (6 points) Home is a poor country. It spends a higher proportion of its income on food than
the rich country Foreign. Foreign considers to pay development aid to Home. In a new
diagram, explain how this transfer payment would affect the terms of trade of Home and
of Foreign.
f) (5 points) Suppose that Home receives better technological knowledge from Foreign, such
that the productivity in the manufacturing sector rises. In a new diagram, explain how
this change would affect the terms of trade of Foreign.
g) (5 points) In a new diagram, explain how a tariff on food (imposed by Foreign) would affect
the terms of trade of Foreign.
Question 3: Shorties
a) (4 points) List four reasons for external economies of trade.
b) (9 points) In the context of a partial equilibrium model, explain the welfare effects of an
import quota (small country case). Use a suitable diagram for your explanation.
c) (5 points) Based on a simple intertemporal trade model with two countries (Home and
Foreign) and two goods (present wheat and future wheat), one may explain international
borrowing and lending. For this simple model, draw a typical transformation curve for
Home and explain why this curve can also be interpreted as a production function of the
good future wheat.
d) (7 points) “The larger the import tariff imposed by a country, the larger the welfare of this
country.” Why is this statement wrong? Draw the correct relationship between the tariff
level and the country’s welfare.
e) (4 points) Consider the Heckscher-Ohlin-Model with two countries (Home and Foreign),
two goods (Manufactures and Food) and two factors of production (Labour and Capital).
Foreign is capital abundant and the production of manufactures is capital intensive. There
arises a trade war between the two countries. As a result, the countries decide to return
to autarky. This affects the recipients of factor income in the two countries. Who gains
and who loses?
f) (11 points) Consider again the two countries described in question 3e). Using offer curves
in the context of the Standard Trade Model, show the world trade equilibrium. What is
the interpretation of offer curves? In your diagram, indicate how the world equilibrium
changes when Home imposes an import tariff. Also give a brief verbal explanation for
this change.
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