1. Formulate the basic gravity equation in logs. Which variable is on the left hand side and which

ones are the explanatory variables. Give an intuitive economic explanation of the impact of these

explanatory variables.

(ii) Give a concise interpretation of the parameters of this model that are usually econometrically

estimated.

(iii) Discuss some main empirical findings from this model.

2. The oldest explanation of trade between countries is based on specialization in production as

formulated in the Ricardo model. (i) Use the production possibility frontier and explain in detail the

effects of trade liberalization (the move from autarky to free trade) on the production and trade

patterns for the two-country Ricardo model. (ii) Give an intuitive explanation why both countries gain

from trade in the Ricardo model. (iii) Illustrate how relative wages are determined under free trade

and give a short interpretation

3. Use the (2 factor, 2 goods, 2 countries) Heckscher-Ohlin model and (i) Formulate the StolperSamuelson theorem. (ii) Discuss why it is useful for analyzing the effects of trade liberalization. (iii)

Use the Lerner diagram and sketch the proof of this theorem.

4. Bradley is a wholesaler. His financial year ends on 31 December.

On 1 January 2015 Bradley had a delivery vehicle A which had cost $35 000 and had been

depreciated by $13 125.

On 1 October 2015 he purchased delivery vehicle B for $40 000 by cheque.

On 1 July 2016 he purchased delivery vehicle C on credit from XZ Motors for $28 000.

All the delivery vehicles are depreciated by 25% per annum on cost calculated from the date of

purchase.

REQUIRED

(a) Prepare Bradley Delivery Vehicle Accounts and provision for depreciation of delivery vehicle accounts for each of the years ended 31 December 2015 and 31

December 2016.

Balance the accounts and bring down the balances on 1 January 2016 and 1 January 2017.