Question

Problem I. True or False. Please support your answers with proper reasoning, mathematical arguments, or graphs. (15 points, 3 points each) 1. Growth in labor and capital as inputs of production in a small country lead to respectively ambiguous and positive welfare effects for the average person of a country. 2. FDI in a small, open, labor-scarce country has an ultra-protrade production effect. 3. According to Rybczynski theorem, factor growth results in either an ultra-protrade or ultra-antitrade production effect. 4. Eurasian Union is an economic union as well as a monetary union. 5. Benefits of FTA are higher if the country has elastic demand and inelastic supply curve.

Answer 1

1.) a. Growth in factors of production like Capital and Labour has ambiguous and positive welfare effects depends on how the enhancement in production process is benefitting the factors of production. Differnt techniques of production are applied almost to every part of economy to increase the efficiency level of capital and labour and to increase their respective productivities.

b. The production function can be written as Y = F ( K, L), stating output level is detremined by two crucial factors of production ie., labour and capital. Increase in number of labour force in small countries will definately affect the outout level but the need of the hour in small countries is Growth in labour force ie., labour force with skills, good work experience and able to deal with the latest machines and techonological equipments. Increased labour force participation also shows positive welfare for the economy with less unemployment and increased productivity.

c. With increase labour force participation , there is dire need of well equipped machines and tools which with labour force can do the production process and can increase the production process in the economy. With sustained groeth in capital, labour will become more skilled and there will be increase in the welfare of the economy.

May be some labour force will have ambiguous effects but overall social welfare level of the economy will increase .

2.) a. FDI ( Foreign Direct Investment) plays a very crucial role in expanding international trade and dometic economy. FDI allows countries to exports goods and services which they have in abundance ( More quantity) and to import goods and services they have in scarce quantity to increase the production and to promote more variety of products for the consumers.

b. With the introduction of FDI , Utlra Pro-trade level an be acheived by importing and adopting of superior production technology and innovation. Firms with outdated skills and technologies along with scarce labour force can arrange to import advanced softwares and technology , which can be later adopted by the abour force to expand the production level and produce final product domesticaly.FDI leads to more inflow of funds by foreign companies for operations of subsidaries opened in domestic countries.The will lead to expanded production for exports which will further boost export earnings and increase Trade level in international market. With this, FDI also indirectly contributes to increased number of job opportunities and Techonology improvements which will boost the economic production.

c. With increased level of jobs , there will be comparatively higher and competitve wages will prevail in the economy due to FDI. There will be positive impact on employment and total factor productivity. More FDI inflows will improve our country's forex reserves and will add more tax ( In the formof corporate tax) which can be further used for fiscal expansion and further improvement of developing economies.

3. a) In simple words, Rybczynski Theorem states that any increase in endowment of one factor of production will increase the output of endowmnet factor industry and decrease the output of other factor of production. For example any increase in labour force or endowment increase the output of labour intensive industry and decrease the output of other factor industry say, capital .

B) If output of endowment factor of production linked to export industry , then export of that country will be higher than imports, which will be referred as Ultra export baised growth.

If output of endowment factor of production linked to Import industry , then imports of that country will be higher than exports, which will be referred as Ultra Import baised growth.

Factor growth in least developed countries always leads to more productivity.If terms of trade ( If Imports is sufficiently higher than Exports ), then growth can be damaged, leads to lower income and welfare.

c) An increase in labour endowment increases the output of labour intensive good more than proportionately, and there will be less proportionate production in capital intensive industry.

If output in both sectors grows at same rate , then labour demand will also grow at same rate. As per  Rybczynski Theorem, the output of one industry will actually falls. This implies that output of other industry must grow more than proportionately.

4.a) Eurasian Union is an economic union of states located in Eastern Europe, Central Asia and Western Asia. The Treaty on the Eurasian Economic Union was signed on 29 May 2014 .leaders of Belarus, Kazakhstan and Russia, and came into force on 1 January 2015.Treaties aiming for Armenia's and Kyrgyzstan's accession to the Eurasian Economic Union were signed on 9 October and 23 December 2014, respectively. Armenia's accession treaty came into force on 2 January 2015.^[5] Kyrgyzstan's accession treaty came into effect on 6 August 2015

b) It is an economic union consisting of mutiple countries contributing their portions for economic growth. It basically promotes free movement of goods, foreign trade,Transport, technical regulation, and antitrust regulation. The economic integration of multiple countries leads to allover economic growth.

c) The increased economic integration leads to Monetary benefits that arises from International trade.

5. A Free trade agreement (FTA) reduces barriers to imports and exports between countries by eliminating all or most tariffs, quotas, subsidies, and prohibitions.It is a decision taken by group of countries .With Inelastic supply ( Fixed supply) there will be fixed amount of goods that will be imported with less restriction . But with elastic demand, consumer might demand more goods . The only solution to this would be local production to satisfy the extra demand with fixed imported goods.

With no limitations on goods but with inelastic supply, there will be more gains from trade .