International Trade and Business
Problem Set 6
Exercise 1
Consider a world composed of two countries, EU and Vietnam, which can be described by the Heckscher-Ohlin model. Assume that both countries produce computers and shoes using labor and capital as factors of production. EU is relatively capital abundant, while the production of shoes is relatively labor-intensive. a) Explain the effect of free trade on the distribution of income within each country.
Describe your answer using a box-plot pertaining Vietnam. b) State which theorem supports the previous explanation, specifying the hypothesis under which the theorem holds. c) Explain why in Europe some protectionist measures may be advocated (max 3 rows). d) According to Maskus (2001), why protectionist policies should not be adopted?
(max 2 rows) e) Which are the alternatives suggested? (max 5 rows)
Exercise 2
With reference to the Rybczynski theorem, explain which is the effect in the long run of the growth due to an increase in capital endowment (labor endowment being equal) in the country which is relatively abundant in labor (consider good X as labor-intensive and good Y as capital-intensive). Illustrate (in the case of a small country and in the case of a big country): a) The effects on production (using the box-diagramme and the transformation curve with the commodity X on the x-axis) b) The consequences for the other country
According to you, the case described in this exercise represents an unlikely event, or instead a similar situation can be observed nowadays in the real world? (max 3 rows)
Exercise 3
Consider the Krugman model (1979) concerning intra-industry trade in a monopolistic competition model. a) Write the equations of the PP and ZZ curves. Explain how to derive these two equations and their economic interpretation. Draw a graph showing how the equilibrium in this market is obtained. b) Which are the other conditions needed to solve the model? c) The efficiency in the market is greater or smaller in free trade relative to the case of a closed economy? In other words, price distortion increases or decreases when the economy moves to free trade? d) For an unskilled workers it is better to work in a sector in which the trade is of inter-industry or intra-industry type?

e) Which is the role of the elasticity of demand in this model? In case of constant demand elasticity, there would be a pro-competitive effect of trade? f) According to the Krugman model, the EU single market (started in 1992) contributed to make the European industry more or less efficient?
Exercise 4 a) Explain the meaning of inter-industry trade and intra-industry trade. b) According to you, which are the main differences between the Heckscher–Ohlin model and the Krugman model? Which of the two model is more suitable to describe North-North trade? Which one fits better for the case of North-South trade? c) Specify the channels through which international trade – as considered by
Krugman – affects the countries that take part to the liberalization of international trade.