XJTLU IBSS Year 2016/2017 Semester 2

ECO312: INTERNATIONAL ECONOMIC RELATIONS

Problem Set 4

SECTION A
Please give a short answer. Indicate whether the statement is true or false and give an
explanation for your answer. Answer all questions.

A1. Under constant opportunity costs assumption, the forces of supply (as given by the nations
production frontier) and the forces of demand (as summarized by the nations indifference map)
together determine the equilibrium-relative commodity prices in each nation in autarky. True
or False? Explain.

A2. The greater nation 1's demand for nation 2's exports is and the weaker nation 2's demand for
nation 1's exports is, the greater Nation 1's share of the gains from trade will be. True or False?
Explain.

A3. Mutually beneficial trade can still occur if production frontiers are the same and tastes are
also the same. True or False? Explain.

A4. With commodities X and Y in the horizontal and vertical axes respectively, if a nation has a
steeper indifference curve relative to that of another nation it means that it has stronger tastes
and preferences for good Y. True or False? Explain.

A5. Suppose Nation 1 has a comparative advantage in good X over Nation 2 and the two
nations are currently engaged in equilibrium trade for good X. A decrease in the cost of
producing good X in Nation 2 would cause the international price of good X to decrease and
the quantity of good X traded to decrease. True or False? Explain.

A6. Suppose Nation 2 is an exporter of good Y. In a general equilibrium framework, an

increase in the demand for good X in Nation 2 will decrease the relative price of good Y and
decrease the volume of exports of good Y by Nation 2. True or False? Explain.

A7. Partial equilibrium analysis can be used to determine the equilibrium relative commodity
price but not the equilibrium quantity with trade. True or False? Explain.

SECTION B
B1: What would happen if the production frontiers are identical and the community
indifference curves are different, but we have constant opportunity costs? Draw a graph of this.

B2: Show graphically how the equilibrium-relative commodity price of commodity Y with
trade can be derived from Figure 4.1 (i.e., The Equilibrium-Relative Commodity Price with
Trade with Partial Equilibrium Analysis) in the textbook.

B3: In what way is a nations offer curve similar to:

1
XJTLU IBSS Year 2016/2017 Semester 2

a) a demand curve?
b) a supply curve?
In what way is the offer curve different from the usual demand and supply curves?

B4. With reference to Figures 4.2 (i.e., Derivation of the Offer Curve of Nation 1) and 4.3
(i.e., Derivation of the Offer Curve of Nation 2) in the textbook, draw the offer curves for
Nation 1 and Nation 2, showing that Nation 2 is a small nation that trades at the pretrade-
relative commodity prices in Nation 1. How are the gains from trade distributed between the
two nations? Why?