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Q(1):- Suppose that the autarky price of commodity x is $ 10 in Nation A, $8

in Nation B, and $ 6 in Nation C, and that Nation A is too small to affect

prices in Nation B or C by trading. If nation A initially imposes a
nondiscriminatory ad valorem tariff of 100 percent on its imports of
commodity X from Nations B and C, will Nation A produce commodity X
domestically or import it from Nation B or Nation C?

Ans:- If nation A imposes Ad valorem tariff on commodity x. In that case

Nation A will produce commodity x Domestically because the price of
commodity x is $10 in Nation A & Its price is $16 When it imports from
Nation B and Its price is $12 when It import from Nation C. This is due to
100% ad valorem Tariff impose by Nation A on import of commodity x.

Due to ad valorem Tariff price of commodity X

is more in nation B and C as compare to Nation A. So It is better for Nation A
to produce commodity X domestically rather Then importing it from Nation B
and Nation C.

Q(2):- The Karma computer company has decided to open a Brazilian

subsidiary. Brazilian import restrictions have prevented the firm from the
selling into that market, while the firm has been unwilling to sell or lease its
patents to Brazilian firms because it fears this will eventually hurts its
technological advantage in the US market. Analyze the Karma’s decision in
terms of the theory of multinational enterprise.

Ans:- Multinational exists because It turns to be more profitable to carry out

transactions Within a firm rather than between firms. There are advantages
of internalization for technology & transfer. If a firm instead of selling
technology to foreign firms, sets up foreign subsidiaries and keep info within
the firm. It would be easier to protect rights.

There are advantages of internalization for vertical

integration. If one (upstream) firm produces a good that is used as An input
for another (downstream) from then problems of coordination will appear
due to Uncertainty of demand or supply.

Q(3):- Show the following information diagrammatically using offer curves

and using your own figures, wherever necessary. India and Germany are
trading partners. India exports cloth to Germany and imports machines.
Equilibrium is established where terms of trade are equal to 1 for both
nations at 70 million units. Germany levies a 100% ad valorem tariff on
imports from India. Show the change in terms of trade. India responds with
a retaliatory tariff. Again show where equilibrium is established after the
retaliatory tariff. In this context explain what an optimum tariff is?

Ans:- Ans. The optimum tariff is that ate of tariff that maximizes the net
benefit resulting from reduction in the volume of trade. That is starting from
free trade position as the nation increases its tariff rate, its welfare increases
up to the maximum and declines as tariff rate increases.

As Germany and India are trading partners Germany imposes ad

valorem tariff on the imports from India which is not an exactly favorable
position from India that’s why India on the counter part imposes retaliatory
tariff on Germany to make its condition better.

Q(4):- Which of the following are direct foreign investments, and which are

A. A Saudi businessman buys a $ 10 million of IBM stock.

B. The same businessman buys a New York apartment building?
C. A French company merges with an American company; stockholders in
the US Company exchange their stock for shares in the French Firm.
D. An Italian firm builds a plant in Russia and manages the plant as a
contractor to the Russian government.
Ans:- Foreign direct investment is that investment, which is made to
serve the business interests of the investor in a company, which is in a
different nation distinct from the investor's country of origin.

Direct Investment Which are and which are not:-

(A)A Saudi Business man buys a $10 million IBM stock is- It is Not a
Direct Investment.

(B)The same business man buys a Apartment in New York is- It is a

Direct Investment.

(C)A French company emerges With an American company stock

holders in the US exchange their stock for shares in the French
firm is- It is Not a Direct Investment.

(D) An Italian firm builds a plant in Russia and manages the plant as
a contractor to the Russian government is- It is a Direct

Q(5):- Under what conditions is the formation of a customs union more likely
lead to trade creation and increased welfare?

Ans. A custom union is more likely to lead to trade creation and increased
welfare under the following conditions:

a) The higher are the reunion trade barriers of member countries. There
is then a greater probability that formation of the custom union will
create trade among union members rather than divert trade from
nonmembers to members.
b) The lower are the customs union’s barriers on trade with the rest of the
world. This makes it less likely that formation of the customs union will
lead to costly trade diversion.
c) The greater is the number of countries forming the customs union and
the larger their size. Under these circumstances, there is a greater
probability that low-cost Producers fall within the unions.
d) The more competitive rather than complementary are that economies
of member nations. There are then greater opportunities for
specialization in production and trade creation with the formation of
the customs union. Thus, a customs union is more likely to increase
welfare if formed by two competitive industrial nations rather than by
an industrial nation and an agricultural (complementary) nation.
e) The closer geographically are the members of the customs union. Then
transportation costs represent less of an obstacle to trade creation
among members.
f) The greater is the pre-union trade and economic relationship among
potential Members of the customs union. This leads to greater
opportunities for significant welfare gains as a result of the formation
of the customs union.

Q(6):- Draw a figure showing what happens if country A forms a customs

union with country C only, though free trade price of the commodity
imported from country B is $2.Country A levies a 100% ad valorem tariff on
imports from country B. The prices of the commodity are summarized as

Free Trade price-$2

Ad valorem tariff -100%

Import price from country C-$3.

Give a real life example of such a customs union.

Ans:- Ans. Custom union is existing between country A and C. thus free
trade will be exist between country A and C. Because Country A and C is a
part of custom union. A levies 100% ad valorem tariff on imports from
country Band the free trade price is $2 but not applicable with country B
because country B is not a part of custom union with country A. when A
imports from the country B imposed 100% ad valorem tariff It become $4
due to 100% ad valorem tariff.

Q(7):- Analysis the effect of foreign investments on the national income of

the Investing and Host Nations taking any two countries as examples?


The effect of foreign investments on both the investing and host countries
results from different rates of taxation & foreign earnings in various
countries. While the investing country that is U.S as a whole gains from
investing abroad, there is a redistribution of domestic income from labor to
capital. It is for this reason that organized labor in the United States is
opposed to U.S investments abroad. On the other hand, while the host
country also gains from receiving foreign investments, these investments
lead to a redistribution of National income from capital to labor.


EX:-If corporate taxes are 40 percent of earnings in the united states but
only 30 percent in England. It is only natural for U.S firms to invest in
England or reroute foreign sales through subsidiaries there in order to pay
the lower tax rate. The United States would collect a tax of only 10 percent
on foreign earnings (difference between the domestic tax rate of 40 percent
and the foreign tax rate of 30 percent) when foreign earnings are

As a result, the tax base and the

amount of taxes collected decline in (investing country) United States an rise
in the (host country) England.

Q(8):- Discuss the BOP position of any one of the following nations, stating
whether the nation has a surplus or deficit in its current account and capital

(1) US

(2) India

(3) Japan

Ans:- INDIA’S BOP : India’s presently has a deficit in its current account of
Bop, which has Increased substantially after reforms in 1991. In 1991- 92
Current Account Deficit was $1,178 million, which rose to $17,403 million in
2007-08 and accounted for $36,469 million for last three quarters of 2008.
One of the Major Factor for increasing current Account deficit in last few year
has been a rising oil import bill.

India has done fairly well on the capital account side. In

2007-08 It had a capital account surplus of $108,031 billion. India’s overall
current account & capital account deficit is $20,380 million for April-
December 2008, which is expected to rise to a figure between $25 and 30
billion by the year ending march 31, 2009.

Q(9):- Taking the case of any one developing country in Asia, Africa or Latin
America, explaining how the country has gained from International trade and
the economic instability resulting, if any from exposure to international

Ans:- International trade:- Singapore has adopted a policy of export-

oriented industrialization, promoting the export of goods and services in the
international markets. It has few barriers against the import of goods and
services, although the government's well-known interventionist policy in the
regulation and ownership of many Singapore companies has been widely

Singapore more than doubled its exports, from US$52.752

billion in 1990 to US$118.268 billion, in 1995. Exports dipped after 1997, but
recovered to reach US$137 billion in 2000. The United States is Singapore's
single largest trading partner, accounting for 19 percent of all exports in
1999, primarily from the sale of manufactured electronics and computer
peripherals. A large part of these exports originates from U.S.-owned
companies, which are traditionally the largest investors in the Singapore
Trade (expressed in billions of
US$): Singapore
Expor Im
ts ports
1975 5.375 8.133
1980 19.376 24.007
1985 22.812 26.285
1990 52.752 60.899
1995 124.507
1998 104.719

Singapore's government considers the development of free trade as an

important factor for the country's future economic growth. Singapore
strongly supported free trade negotiations between the members of the Asia
Pacific Economic Cooperation organization (APEC), which tried to remove
trade barriers between member countries, including the United States,
Canada, Japan, Australia, and others. Singapore also strongly supported the
creation of a regional free trade zone for the Association of South East Asian
Nations (ASEAN), to be known as the ASEAN Free Trade Zone (AFTA). In
2001, Singapore announced its intention to discuss bilateral free-trade
arrangements with Australia, Canada, Japan, and the United States.

ECONOMIC INSTABILITY:- investigates the time series relationship

between export earnings instability and instability in receipts from
international tourism for Singapore between 1972 and 1988. Computes four
standardized instability indexes for both merchandize exports and
international travel receipts, having suitably adjusted the official export
series for re-exports and corrected the two data series for trend.

There is some support for the view that export receipts are more unstable
than tourism receipts. Although exports are generally more unstable over
the whole period, they were relatively more unstable in the early to mid-
1970s during a period of international instability. Tourism receipts, on the
other hand, were relatively more unstable in the 1980s, partly as a result of
world recession, but also because of structural problems in the tourism
industry in Singapore. Also finds that the development of the tourism sector
in Singapore has exerted a net destabilizing effect on total exports of goods
and services.

Q(10):- Write a note on India’s trade Deficit or Surplus With Any Trading
Partner ?

Ans:- China become India’s second largest trading partner. India enjoyed a
comfortable trade surplus of $1.75 billion, according to Chinese custom
statics. It growth remains at current levels, India china trade could cross $17

India’s annual trade surplus with china widened

rapidly. Before2005 India’s trade deficit with china was about $0.2 billion on
average, never exceeding $0.4 billion. In 2006 India’s trade deficit with
china was converted to a surplus of $0.91 billion. In 2008 Indian Exports to
china grew by 80.5 % to reach $7.68 billion while India’s imports from china
registered a 77.2 % year on year growth to hit $ 5.93 billion.

India was the ninth largest trading partner of

china in Asia in 2008. Monthly trade volume between India & china recorded
in December stood a yearly high of $1.44 billion, surpassing November’s
high of $ 1.32 billion.