S. No.

: 4120 (Paper held on Date: 07/12/2022)

Q1: Ricardian Model, KOM, Ch 3

Labour in K = 50; Labour in A = 150

U(X,Y)=X0.6

i. OC of X by Y

Kiteland: (1/3)/(1/4) = 4/3 = 1.33 Airland:

(1/5)/(1/8) = 8/5 = 1.6 ii. Coordinates of

PPC in the two countries: PPC of Kiteland:

X = [150,0]; Y = [0,200]

PPC of Airland: X = [750,0]; Y = [0,1200]

iii. Under free trade, equilibrium price = 1.6.

(iv) Kiteland produce only Good X, Airland produce both the goods. It produces both the
goods. Kiteland produces only Good X.
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(v) If complete specialization, X/Y = 150/1200 = 0.125

(3*5) (NB:In case the student to begin with has failed to calculate the ULC right, then
if the rest of the work is fine, we shall give maximum of 6 marks)

Q2 (a) Standard Trade Model: Intertemporal Model (8 Marks)

KOM Ch 6, pp-167-170, Diagram 6.12; if student draws PPC diagram, if correct, give marks

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(b) Specific factors Model: Perfect Labour Mobility (7 Marks) KOM

Ch 4, pp-102-104, Diagram 4.13

Q3 HO Model; Gandolfo, CH 4

i. Home is going to export Milk and Foreign is going to export Sugar. Incomplete
specialisation. Students have to write all the reasons.

(5 Marks)

ii. Conditions: (K/L)M < (K/L) S; no factor intensity reversals; identical demand conditions;
Incomplete specialization, etc.etc.etc. ( 1 marks )

Student has to show at least two cases: existence of segment of equalization and
nonexistence of segment of equalization ( 2 marks) Diagram:

(b) KOM, CH 10, Diagram 10.3, pp- 275-277 ( 4 marks)

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(c) KOM, Ch 10, Diagram 10.2, pp-274-275 ( 3 marks)

Q4 (a) Market Integration, KOM Ch 8, pp-207-210

A B C
Sales 10,00,000 90,00,000 40,00,000
FC 750,000 750,000 750,000
MC 5000 5000 5000
b 1/30,000 1/30,000 1/30,000
Number of firms 200 600 400
(n)
Price under 5150 5050 5075
autarky (P)
TC = FC + MC*Q

AC = FC/Q + MC

Q=S/n

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 P = AC (solving this, we get the following values for n and P)

iii. After the economies are opened up, then total sales = 1,40,00,000

n* = 748.33 => 748 (This equilibrium number of firms is lower than the total number of
firms in individual countries before trade, i.e. 200+600+400 = 1200)

P* = 5040.11 (This equilibrium price is lower than the autarky prices in all the countries)

iv. Country A gains the most. Total number of firms reduces but consumers in every country
will get a higher variety of products to consume

(4+4+3+1): (3Marks for writing the equations and made an initial attempt)

(b) Leontief Paradox, pp-90-91: “Leontief’s results were in sharp disagreement with the
Heckscher-Ohlin theorem (according to which the US ought to have exported capital-intensive
commodities)” ( 3 marks)

Q 5 Offshoring Model, FT CH 7, pp-213-219

i. Diagram 7.10

Software in place of R&D on Y-axis Computer Components on X-axis ii.

Diagram 7.12 (students can show only change in relative salaries of engineers)

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Q6 (a) ERP; KOM, CH 9, pp- 242-244 Free

trade price of automobiles = 8000

Component price = 4000

i. 20% on imports of automobiles => 1600. Profit = 9600-4000 = 5600 ERP = (5600-

4000)/4000 = 40% ii. 10% on auto components => Profit = 8000 – 4400 = 3600 ERP

= (3600-4000)/4000 = -10% iii. 20% on automobiles and 10% on auto components =>

Profit = 9600 – 4400 = 5200 ERP = (5200-4000)/4000 = 30%

iv. The tariff on automobiles, ie., the first is the best

(3+3+2+1 = 9)

(b) Offer Curve, Gandolfo, Ch 3, Diagram 3.7 b, pp-47-53, it should be labelled also (
6marks)

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Q 7 (a) Export Tariff, FT, Ch 10, pp-345-347, Diagram 10.6

There is a fall in producer surplus than under free trade.

(8 marks)

(b) Negative Externality. FT, CH 11, pp-392-393, Diagram 11.4 a

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 The diagram “illustrates a negative production externality, which means that the social
marginal cost curve, SMC, lies above the private marginal cost (supply) curve S. With
free trade, the price falls from PA to PW and Home supply falls from Q0 to S1. As a
result, the social cost of the externality is reduced by area c, which measures a social gain
that is additional to the private gains from trade, area b.”

Q8 (a) Lobbying, Gandalfo, Diagram 12.5, pp- 283

Cost of lobbying falls, producers prefer to lobby the government and go for higher tariff
rates.

(8 Marks)

(b) Export Subsidy, Gandolfo, Diagram 10.12, p-248

“In an oligopolistic market, an export subsidy can provide a strategic advantage to the domestic
firm and hence shift rents (from the foreign to the domestic firm) and ultimately cause a
welfare increase in the country that subsidizes the domestic firm.” (7 Marks)

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Intenrtional Trade: S. No. : 4260 (Date 09/12/2022)

Q1 a: Ricardian Model, KOM, Ch 3

Labour in A = 500; Labour in B = 1500

U(X,Y)=X0.4

ULR of X in A = 1/3; ULR of Y in A = ¼ ULR

of X in B = 1/5; ULR of Y in B = 1/8

i. OC of X by Y

A: (1/3)/(1/4) = 4/3 = 1.33 B:

(1/5)/(1/8) = 8/5 = 1.60

ii. Under free trade, equilibrium price = 1.6; Country A produces only Good Y, Country B
produces both the goods.

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Equilibrium quantity = 5/12 and Equilibrium Price = 1.6 iii. Complete

specialization: NO, because Country B is producing both the goods (3+4+3) )

(NB:In case the student to begin with has failed to calculate the ULC right,

then if the rest of the work is fine, we shall give maximum of 4 marks)

Q1 b. (b) Specific Factors Model, KOM CH 4, p- 92, Diagram 4.6

Income of landowners, capital owners and workers will remain the same. Nominal wages
will increase in the same proportion. Real wages will remain the same.

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This diagram can be appropriately changed for Good A and Good B, rather than Food and
Cloth.

(5 Marks)

Q 2 a. External economies of scale, KOM, Ch 7, Example of Thai and Swiss watches, pp-
188-189, Diagram 7.5

(8 Marks)

(b) Standard Trade Model, KOM CH 6, pp-164-165, Diagram-6.9. ToT for Home will
improve.

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 This diagram can be appropriately changed for wheat and rice, in place of cloth and food. (7

Marks)

Q3 Gandolfo Ch 4 and 5

(a) HOV Theorem, Diagram 4.11, pp-80-82

Theorem (Heckscher-Ohlin-Vanek). Each country is the net exporter of the services of its
abundant factor and the net importer of the services of its scarce factor. ( 2 extra for diagram ,
4 for the explanation)

(b) Missing Trade, Productivity differences, Trefler: “Mystery of missing trade”, pp-97-99

(c) Rybczynski’s Theorem:

According to Rybczynski’s Theorem, an increase in the quantity of a factor (given the other)
will cause an increase in the output of the commodity which is intensive in that factor and
a decrease in the output of the other commodity, at unchanged commodity and factor
prices.

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Students can make either of the two diagrams. If unchanged factor and commmo prices
not emphasised 1.5 marks shall be reduced)

(6, 4, 5)

Q4 a. (a) Export Quota, FT, Ch 10, pp-347-349, Diagram 10.7 ( diagram on the left),
Domestic price increases, ToT increases for Home country.

Quota rents in case of export quota go to domestic firms. In case of VER, it goes to foreign
firms. (only 1 mark)

(8 marks)

(b) Ad valorem tariff, FT Ch 11, pp-375-377. Cost of production in Countries A,B and C are:
40, 32 and 26.
A B C
A 41.60 33.80
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 B 48.00 31.20
C 44.00 35.20
Prior to formation of FTA, A and B import sugar from C, even if there is ad valorem tariff.

When A and B are signing FTA, sugar is available at duty free rate from B to A, at price 32.
While it is available from C at price 33.80. Thus, trade is being diverted from C to B
when A signs FTA with B.

(7 Marks)

Q5 (a) Persistent Dumping, Gandolfo, Ch 12, pp-287-290, Diagram 12.6

Price in Foreign country charged by Home is lower than the price charged by Home in its
own country.

Range of anti-dumping duty = Ph-Pf

(9 Marks)

(b) Horizontal FDI decision (Krugman, PP- 226-227): If F/Q < t (Q>F/t), then exporting is
more expensive, and FDI is the profit-maximizing choice.

(3 Marks)

(c) Intra-industry Trade, KOM, Ch 8, pp- 210-211

Higher index, means higher intra-industry trade => Chemicals has more intra-industry trade
relative to clothing.

(3 Marks)

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Q6 (a) Export subsidy versus Production subsidy

FT, CH 10, pp-331-334, Diagram 10.1; pp-340-341, Diagram 10.4

Gandolfo, Ch 12, pp-280-281, Diagram 12.3

Domestic economy Price = $60, quantity = 30 (pre-trade)

At world price of $70, quantity exported = 5

i. Export subsidy by small economy = $10, thus price increases by $10 to $80.

New quantity exported = 10

Consumption distortion loss = Production distortion loss = 12.5. Total distortion loss = 25

Shaded triangles are distortion loses. ii. In case of production subsidy, there is

only production distortion loss of $12.5 iii. Production subsidy is better

(b) (i) Optimum Tariff

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 (ii) Immiserizing growth

Economic growth biased towards exporting good then TOT declines.

Q7 (a) Proximity-concentration tradeoff, KOM, Ch 8, pp- 226-230.

Boreland: Autarky price = 2; Autarky quantity = 6

Pipeland: Autarky price = 1; Autarky quantity = 6

(i) World: Equilibrium Quantity = 12; equilibrium price = 1.5 (5 Marks)

Boreland is an importer. Pipeland is the exporter. Quantity exported by Pipeland = 2 ii.

Cost of transportation => t*Q = 2*0.25 = 0.50

FC of setting production abroad => F = 2.5

F > t*Q => Thus, better to transport rather than setting production line abroad. iii.

Tradeoff: Proximity-concentration tradeoff

Part (ii) and (iii): 5 Marks

(b) External Economies, KOM Ch 7, pp-180-183

“Marshall argued that there are three main reasons why a cluster of firms may be more efficient
than an individual firm in isolation: the ability of a cluster to support specialized suppliers; the

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way that a geographically concentrated industry allows labor market pooling; and the way that
a geographically concentrated industry helps foster knowledge spillovers.”

(5 Marks)

Q8 (a) There is an important omission related to the equation in the paper. (A moderate
assessment of the question shall be done, with diagram 9 marks , without 6 marks)

(b) Labour agreements, FT Ch 11, pp- 380-387: Explain Consumer responsibility, corporate
responsibility, country responsibility, living wage ( 6 marks)

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