Based on the book “International Economics” By Paul Krugman
1. In the Heckscher-Ohlin model of international trade, assume that at current factor prices cloth is produced using 20 hours of labour for each unit of capital (machine) and that food is produced using only 5 hours of labour per unit of capital.
(a) Suppose that the economy’s total resources are 2400 hours of labour and 240 units of capital. Use a diagram like the one we used in the lecture to determine the allocation of resources. (20 marks)
(b)Now suppose that the labour supply increases first to 3200, then 4000, then 4800 hours. Using a diagram again, trace out the changing allocation of resources. (60 marks)
(c) What would happen if the labour supply were to increase further? (20 marks)
4. Quantitative restrictions have been important in trade policy. We here focus on their mechanism and rationale. PAGE 253 of “International Economics” 10th Edition by Paul R. Krugman
a) Define what is meant by an import quota. Analyse its effects in the context of the US sugar import quota of 2002 discussed during the lectures. Compare these to the analogous effects of an import tariff rather than this quota.
(b) To illustrate your points, use the standard diagram from the textbook, with the price of sugar on the vertical axis and the quantity of sugar on the horizontal axis. (50 marks)
10. You are provided the following information for the (simplified) balance sheet of a hypothetical central bank:
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