STOCKHOLM UNIVERSITY
Department of Economics
Course name:
International Economics
Course code:
EC2301
Examiner:
Harry Flam
Number of credits: 7.5 credits
Date of exam:
Tuesday, 17 August 2010, 9-12
Examination time: 3 hours
Write your name, Swedish personal number and the number of the question
on every cover sheet. Do not write answers to more than one question in the
same cover sheet. Only legible exams will be marked. No aids are allowed.
Swedish-speaking students should answer in Swedish.
The maximum number of credits is 99 (for answers on the exam) + 16 (for
assignments).
Credits correspond to grades as follows:
90 – 115
80 – 89
70 – 79
60 – 69
50 – 59
0 – 49
A
B
C
D
E
F
If you think that a question is vaguely formulated, specify the conditions used
for solving it.
Results will be posted on the notice board, House A, floor 3, 7 September at
the latest.
1. Explain the following concepts in 50 words maximum. (2 credits per
concept)
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
absolute advantage
terms-of-trade
Leontief’s paradox
Stolper-Samuelson theorem
effective factor endowment
Rybczynski theorem
foreign direct investment
intra-industry trade
anti-dumping duty
skill-biased technical change
optimal tariff
infant industry
2. Assume that Home and Foreign produce two goods, TVs and cars, and
use the information below to answer the following questions.
In the No-Trade Equilibrium
Home country
Wage-TV = 12
MPL-TV = 2
Price-TV = ?
Wage-Cars = ?
MPL-Cars = ?
Price-Cars = 4
Foreign country
Wage-TV = ?
MPL-TV = ?
Price-TV = 3
Wage-Cars = 6
MPL-Cars = 1
Price-Cars = ?
a) What is the marginal product of labor for cars in Home and TVs in
Foreign? What is the no-trade relative price of TVs at Home and Foreign
respectively? (5 credits)
b) Suppose the world relative price of TVs in the trade equilibrium is 1.
Which good will each country export? Briefly explain why. (5 credits)
c) In the trade equilibrium, what is the real wage at Home and Foreign
respectively in terms of cars and in terms of TVs? How do these values
compare with the the real wage in terms of either good in the no-trade
equilibrium? (10 credits)
d) In the trade equilibrium, do Foreign workers earn more or less than those
at Home, measured in terms of their ability to purchase goods? Explain
why. (5 credits)
3. Suppose that Home and Foreign produce two goods, timber and televions.
Assume that land is specific to timber, capital is specific to televisions, and
labor is free to move between the two industries. When the two countries start
to trade, the relative price of televisions falls in Home.
a) In a graph with wage on the vertical and labor on the horizontal axis,
show how the wage changes in Home due to the fall in the price of
televisions, holding constant the price of timber. Can we predict the
change in the real wage? Use the graph to explain. (10 credits)
b) What is the impact of opening trade on the rentals on capital and land
in Home? Can we predict the change in the real rentals on capital and
land? Use the graph to explain. (10 credits)
c) What is the impact of a change in the supply of labor on the real wage
and the real returns to capital and land in Home? Use the graph to
explain. (5 credits)
4. Consider a small country applying a tariff t, to imports of a good.
a) Suppose that the country decides to abolish its tariff. What happens to
the quantity and price of gods produced at Home? What happens to
the quantity of imports? Illustrate your answer with a graph. (5 credits)
b) Show the changes in consumer and producer surplus, and in
government revenue of abolishing the tariff in the graph. (5 credits)
c) What is the overall effect on welfare? If there are gains or losses,
explain why. (10 credits)
d) Suppose that instead of a tariff, the government abolishes an equally
restrictive quota. What, if any, is the difference in the welfare effect? (5
credits)