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ECO364H5S page 1 of 4
University of Toronto Mississauga
Eco364H5S International Trade Theory
April 2021 Final Examination
Duration: 2 hours
Aids: Non-programmable calculator
Professor Gregory Gagnon
Name (Print):
Last Name:
First Name:
Student Number:
Signature:
There are 4 pages in the exam including this cover page
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Submit a pdf file of the answers to the Quercus Drop Box by
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ECO364H5S page 2 of 4
Part A: Multiple Choice.
15 marks.
Each question is worth 3
marks
.
1. Western Europe exports manufactures to Russia and imports oil from
Russia. This might be viewed as
a. validation of the Heckscher-Ohlin model.
b. validation of the Ricardian model.
c. both (a) and (b).
2. Consider the Specific Factors model and suppose the foreign economy
is capital abundant while the domestic economy is labour abundant. Suppose
investment brings domestic capital up to foreign levels then trade in
M
should
a. fall.
b. rise.
c. be unchanged.
3. Suppose foreign demand for
F
falls in the Specific Factors model then
domestic nominal wages will
a. rise in manufacturing.
b. fall in agriculture but not manufacturing.
c. fall in both agriculture and manufacturing.
4. Econometric analysis of US-China trade relations suggests
a.
developed economies suffer higher unemployment immediately from
trade liberalization.
b.
developed economies may benefit from trade liberalization in early
stages.
c. developed economies lose high tech industries as a result of free trade.
5. Suppose the US joins the Trans Pacific Partnership then Factor Price
Equalization predicts
a. a rise in US wages because of faster economic growth.
b. a fall in US wages only if labour is completely mobile between the US
and Asia.
c. the combination of growth and competition will leave US wages un-
changed.
solution: 1.a 2.a. 3.c 4.b. 5.b
ECO364H5S page 3 of 4
Part B: Numerical Problems. 20 marks
1.
Consider the Specific Factors Model.
Let
RS
d
,
RS
*
and RS be the
domestic, foreign and world relative supply curves.
M
is capital specific and
F
is land specific.
The foreign economy is
K
abundant and the domestic
economy
T
abundant.
Let the curves be as follows:
RS
d
:
P
d
M
P
d
F
=600+0.8
Q
r
RS
*
:
P
*
M
P
*
F
=800+0.8
Q
r
RD:
P
M
P
F
=1200-0.3
Q
r
(5) a. Find equilibrium
Q
r
.
(5) b. Find equilibrium
P
M
P
F
.
solution: 1. a. 700 + 0
.
8
Q
= 1200
-
.
03
Q
so
Q
= 454
.
5
b.
P
M
P
F
= 700 + 0
.
8(454
.
5) = 1064
2. Consider the standard trade model with goods
C
and
F
. The PPC
curve is given by 2
Q
2
F
+ 5
Q
2
C
= 8. The utility of the agent is
U
(
q
C
, q
F
) =
q
1
2
F
+
q
1
2
C
. Let
p
C
= 2 and
p
F
= 3.
(5) a. Find the optimal consumption bundle (
q
C
, q
F
).
(5) b. Find whether trade occurs.
a.
Q
F
= 1
.
84 and
Q
C
= 0
.
497 and
q
F
= 0
.
87 and
q
C
= 1
.
95
b. the economy imports
C
and exports
F
.
Part C: Theoretical Problems. 65 marks.
1.
In the Specific Factors Model RD-RS diagram analyze the effect of
following shock on
p
M
p
F
. The domestic economy is land abundant, the foreign
economy capital abundant,
F
is the land specific good and
M
the capital
specific good. Let
M
be manufactured goods and
F
food.
(5) a. Pesticides used by domestic farmers depress land fertility.
(5) b. For the shock in (a) explain the effect on world trade of
M
in a
sentence.
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