International Economics

Answer all questions for 50 unscaled points. You must note that Questions 1 and 3 require

the use of economic models.

Section 1 International Trade

Q1. Suppose Freedomia can trade with Utopia and Concordia. When it trades with Utopia it can

produce 10 units of Koolscrap and import 90 units from Utopia. When it trades with Concordia

it can produce 20 units of Koolscrap at $3 per unit and import 70 units. Freedomia imposes a $2

per unit tariff on its trading partners and produces 30 units of Koolscrap when it trades with

utopia, and 40 units when it trades with Corcordia. It imports 50 and 30 units respectively.

Subsequently Freedomia decides to sign a free-trade agreement with Utopia

(a) What is the producer surplus for trading with Concordia before the tariff? (5 Points)

(b) Is the union a trade-creating or trade diverting Union? Why? (5 Points)

(c) What is the net loss of tariff with this agreement? (5 Points)

(d) Briefly discuss the political economy of the tariff. (5 Points)

(e) How could currency devaluation affect the trade balance of Freedomia? (5 Points)

Section 2 International Finance

Q2. In the light of Mundell's arguments, is the Eurozone an optimal currency area? Critically

discuss the challenges of convergence criteria and fiscal policy for the stabilization of the

economies in the Eurozone.(5 Points)

Q3. With the aid of an illustration, explain how the gold import and export points maintained

price stability under the gold standard. Why did the classical gold standard collapse? Why has it

been a challenging proposition to maintain the fixed exchange rate regime in Europe and Latin

America? (10 Points)

Q4. What is the difference between covered and uncovered interest parity? Suppose the eurodollar

exchange rate is 0.94, euro and dollar denominated assets pay 3% and 4% rates of return

respectively, what would be a three-month forward rate if the theory of covered interest parity

holds? (5 Points)

Section 3 Development

Q5. What is economic development? With reference to applicable or relevant empirical work,

discuss the impact of international trade, finance, and religion on economic development.

(5 Points)