Question

1.True or False (You have to provide a brief explanation) (60%)

(a)By observing international trade data, it is possible to see that the bilateral volume of trade increases proportionally with GDP but decreases with distance. (10%)

(b)The assumption of identical and homothetic utility function implies the relative demand is independent with income level. (10%)

(c)In the specific factor model, the relative supply curve is a horizontal line. (10%)

(d) Ricardo pointed out that patterns of trade are determined by the absolute productivity level. (10%)

(e)In the Ricardian model, the equilibrium price level is completely determined by the opportunity cost. (10%)

(f)Economic the foreign country must decrease the welfare of the home country. (10%)

Answer 1

1.

a) False

The international trade volume increases more than proportionately with GDP and decreases more than proportionately with distance

b) True

The assumption of identical and homothetic utility function implies that the relative demand is independent with the income levels but is dependent upon the relative prices.

The consumer preferences expressed by an utility function is said to be homothetic if it is expressed as a function that is homogeneous of degree one.

c) False

In a specific factor model the supply curve slopes upward.

d) False

According to Ricardo the pattern of trade is determined by the comparative advantage not absolute productivity levels.

e) True

In the Ricardian model, the equilibrium price level is determined by the opportunity cost of labour.

The concept of opportunity cost in terms of the value of the commodity was introduced by Gottfried Haberler .

f) The economic gain of the foreign country needn't decrease the welfare of the home country. There can be gains by importing goods from the foreign country. For example, the people will have access to a wide range of products through imports.