B.A. (Hons.

) Economics
International Economics
Semester VI

Duration: 3 Hours Maximum Marks: 75

Instructions.
Attempt five questions in all, selecting three questions from Section A and two
questions from Section B.

1. A. (i) Ukraine produces two goods, wheat and rice, where wheat is
labour intensive and rice is land intensive good. Show the
relationship between the ratio of factor prices and relative price of
the goods.
(ii) What happens to the production of wheat and rice if the countrys
supply of labour is increased? Explain it with the help of
Edgeworth box and production possibility frontier.
B. Contrast export-biased growth as against import biased growth with the
help of diagrams. Under what conditions could growth be immiserizing?
C. Explain the determination of equilibrium exchange rate using offer
curves. Using this depict the impact of imposition of tariff on import by
the large home country on its terms of trade.

2. A. When there are external economies, trade can potentially leave a

country worse off than it was in the absence of trade. Discuss with an
example
B. International factor mobility and free trade can substitute for each
other. Discuss.
C. A transfer worsens the donors terms of trade if the donor has a higher
marginal propensity to spend on its export good than the recipient. If the
donor has a lower marginal propensity to spend on its export good, terms
of trade will improve. Explain the statement on the basis of the results of
the standard trade model 5

3. A. Suppose the market demand and supply for cloth in US are given:
Qtd =14020P and
Qts = 20P 60.
Where P is given in dollars

(i) Calculate the equilibrium price and quantity for cloth in US under
autarky.
(ii) If US allows free trade and P = 4 on world market, assuming no
transportation costs, how much cloth will US produce, consume
and import?

Bliss Point Studies 1 Ravindra N Jha

011-45076221 9811343411
 (iii) Now US decides to levy a unit tariff of 1 on every unit of cloth
import, resulting in the world prices falling to 3.5. Calculate the
net welfare gain/loss of US.

B. The demand and supply curves of wheat for Home and Foreign are
respectively.
D= 1400 50 P; S =600+50P
D* = 1000 50 P; S* = 200 + 50P
Find:
(i) The equations of import demand and export supply curves.
(ii) The equilibrium price and quantity in Home and Foreign without
trade.
(iii) If the trade takes place, then the equilibrium world price and the
quantity of export and import.

(iv) If a tariff of f 5 per unit is imposed what will be the change in

Home price, Foreign price and the quantity of export and import?

C. It is always preferable to deal with market failures as directly as

possible. Examine this in the context of import tariff.

4. A. XYZ is a small country unable to affect world prices. It imports

commodity A at a price of Rs. 20/ kilogram.

The demand curve is D = 400 5P

The supply curve is S = 100 + 5 P
Determine the free trade equilibrium.
Suppose an import quota which limits imports to 80 kilos of commodity
A is imposed,
Calculate and graph the following effects:
(i) Consumption distortion loss
(ii) Production distortion loss
(iii) Quota rent. 5
B. Explain specific factor model by using diagram.
C. Argentina has 1200 units of labour available and Brazil has 3600 units
of labour available. Both countries can produce coffee and while copper.
The unit labour requirement for Argentina in the production of coffee is
4 while in copper it is 2. The unit labour requirement for Brazil in the
production of coffee is 16 while in copper it is 4.
(i) Construct Argentinas and Brazils production possibility frontiers,
algebraically & diagrammatically.

Bliss Point Studies 2 Ravindra N Jha

011-45076221 9811343411
 (ii) If there is free trade between two countries, what is the
equilibrium relative price of coffee (if demand for coffee/demand
for copper = price of copper , price of coffee)
(iii) Discuss pattern and gains from trade.

5. A. In India, Bengaluru is a hub of information technology industry. Explain

in light of Marshalls theory of external economies.
B. Differentiate between Intra-industry and Inter-industry trade.
C. What is reciprocal dumping? Explain.

PART B

6. A. Consider a country with fixed exchange rates. Show that by fixing the
exchange rate central bank gives up its ability to influence the economy
through monetary policy. Explain how the fiscal policy becomes a more
potent tool for affecting output and employment.
B. Asses the efficacy of fiscal policy under fixed exchange rate regime with
perfect capital mobility (Use DD-AA diagrams).
C. Illustrate and explain with the help of a diagram capital flight which
occurs in the context of the expectations relating to devaluation, under a
fixed exchange rate regime.

7. A. With flexible exchange rate, the exchange rate can overshoot to its new
long run equilibrium level after the monetary expansion. Given the above
statement, explain that by introducing an additional source of
overshooting J-curve effects amplify the volatility of exchange rates.
B. Discuss separately with suitable diagrams the effects of increase in the
U.S. money supply and European money supply on Dollar/Euro
exchange rate.
C. Explain diagrammatically how can asset markets remain in equilibrium
and also derive the AA schedule.

8. A. What do you mean by exchange rate pass through? Is this always

complete? Comment briefly.
B. Critically examine the case for floating exchange rates based on three
claims Monetary policy autonomy, symmetry and the exchange rates as
automatic stabilizers.
C. In an open economy what is meant by Internal Balance and External
Balance? How do these goals of internal and external balance motivate
economic policy makers in open economies?

*****All the Best*****

Bliss Point Studies 3 Ravindra N Jha

011-45076221 9811343411
 The Gravity Model

The gravity model relates the trade between any two countries to the sizes of
their economies. Using the gravity model also reveals the strong effects of
distance and international borders.
There is a strong empirical relationship between the size of a countrys economy
and the volume of both its imports and its exports.
Looking at world trade as a whole, economists have found that an equation of
the following form predicts the volume of trade between any two countries fairly
accurately
T ij =A Y i Y j / Dij
(i)
where A is a constant term,
T ij is the value of trade between country i

and country j ,
Y i is country i' s GDP, Y j is country j's GDP, and
Dij is the distance between the two countries. That is, the value of trade
between any two countries is proportional, other things equal, to the product of
the two countries GDPs, and diminishes with the distance between the two
countries.
An equation such as (i) is known as a gravity model of world trade. The reason
for the name is the analogy to Newtons law of gravity: Just as the gravitational
attraction between any two objects is proportional to the product of their
masses and diminishes with distance, the trade between any two countries is,
other things equal, proportional to the product of their GDPs and diminishes
with distance.
Economists often estimate a somewhat more general gravity model of the
following form:
T ij = A Y ai Y bj / Dcij (i)
This equation says that the three things that determine the volume of trade
between two countries are the size of the two countries GDPs and the distance
between the countries, without specifically assuming that trade is proportional
to the product of the two GDPs and inversely proportional to distance. Instead,
a, b, and c are chosen to fit the actual data as closely as possible. If
a, b, and c were all equal to 1, this would be the same as Equation (i). In
fact, estimates often find that (i) is a pretty good approximation.

*******

Bliss Point Studies 4 Ravindra N Jha

011-45076221 9811343411