International Trade

EC/FI 463/563

Exam 1

Instructions: Students will answer 5 of the following 7 questions. Specifically, each student will answer the first question and then choose 4 of the following 6 to complete the total of 5 questions. Each question is equally weighted. Note: Use a graph when possible to fully explain the answer to a question. Also, draw large and clear graphs.

Answer the following question.

Discuss and graph the free trade equilibrium under the constraints of the Heckscher-Ohlin Theory. In your analysis make sure to discuss how the H-O model explains trade patterns and how these trade patterns promote equalization of factor prices among nations. Discuss any potential problems with the H-O theory.

Choose 4 of the following 6 questions:

Assume that Freedonia produces and exports clothing and imports food. Under constant cost conditions use a graph to show that the free trade equilibrium with complete specialization is superior to the equilibrium obtained when the government mandates a certain level of food production. Make sure to fully explain what is occurring in your graph and discuss, using your results, why you think consumer welfare is lower with government mandated production.

Discuss four reasons that trade is important.

With a given level of world resources discuss how it is possible for trade to bring about an increase in total world output.

Describe the Mercantilist theories regarding international trade and discuss the problem with Mercantilist theory in the long term.

Assume that the home nation exports corn and imports wheat. Show the cone of specialization graphically and use Offer Curves to