University of Hong Kong
2nd semester 2007-08
ECON0301 Theory of International Trade
Assignment 3
Y. Stephen Chiu
Due time: noon, 29 February 2008 (Friday)
Answer all of the following questions, and hand in your OWN script to your TA (Mr. Ambrose Wong)
on or before the deadline via his pageon box on the 9th floor of K.K. Leung Building. Please limit your
answer to each question to one page.
1.
(Heckscher-Ohin model) Which of the following characterize the Heckscher-Ohlin Model?
a. Perfect mobility of factors across industries
b. Perfect mobility of factors across countries
c. Constant returns to scale
d. The law of diminishing returns
e. Identical technologies across industries
f.
Identical technologies across countries
g. Monopoly power
h. Perfect competition
i.
Full employment
j.
Balanced trade
k. Identical homothetic preferences
2.
(Lerner Curve in HO model) Suppose that the price of a good, X, is p X and that potential
producers of that good in a country face factor prices w0 and r0. The three figures below show
three ways that these prices might appear in an isoquant-isocost diagram. What can you say, in
each case, about what will happen in the X industry in this country? That is, will the good be
produced, can these prices constitute an equilibrium, and if so, what technique of production will
be used to produce X?
0
b)
a)
c)
0
1/r
1/r0
X  1/ p
1/w0
0
X
L
1/r0
K X0
X  1 / p X0
L0X
1/w0
L
X  1 / p X0
1/w0
3.
Question 2, p. 77 Chapter 4, Krugman and Obstfeld, 7th edition, 2006 (or Questions 2, p.87, 6th
edition, 2003)
4.
(Standard Trade Model) Use “community” indifference curves as your indicator of national
welfare in order to evaluate the following claim: “An improvement in the terms of trade increases
welfare only if the country increases its quantity of exports in response. If a country is unwilling
or unable to increase exports when their price rises, then the price increase does it no good.”
Please limit your answer to each question to one page.
End of assignment
1
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