Solve the following.
Use the (2 factor, 2 goods, 2 countries) Heckscher-Ohlin model and (i) formulate the Stolper- Samuelson theorem. Discuss why it is useful for analyzing the effects of trade liberalization. For this assume that a small country abolishes its tariffs on labor intensive goods. What would the Stolper- Samuelson theorem predict? (ii) State the most important assumptions underlying this theorem and give the main arguments of its proof.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.Many countries have import quotas on certain goods. Use a partial equilibrium model under perfect competition to illustrate the effects of an import quota for the case of a small country.ll} Formulate the basic gravity equation In logs. Which variable Is on the le hand side and which ones are the explanatory variables. Give an Intuitive economic explanation of the impact of these explanatory variables. [Ill Give a concise Interpretation of the parameters of this model that are usually econometrlcailyr estimated. :lii} Discuss some main empirical findings from this model. Assume a two goods economy. Furthermore, assume that there is a monopoly for one good, say salt, but all other markets including that for labour and capital are competitive. (2x) (i) Illustrate the price setting behaviour of the monopolist under autarky and explain its mark- up pricing behaviour. Give also a formal illustration. (ii) Use the production possibility frontier and illustrate why this economy is not producing at the social optimum. Illustrate the equilibrium conditions (also formally) and the distortion induced by the monopoly.ME1. Sometimes a fixed-for-fixed currency swap is described as a combination of independent forward contracts. Show that, to replicate a fixed-for-fixed currency swap by a series of independent contracts, one needs identical term structures across the two currencies. Hint: Denote the foreign swap rate by s*, and the domestic swap rate by s. Consider a swap where the foreign leg has a nominal value of one unit of foreign currency, and the home currency leg has a value of S, units of home currencies. The foreign-currency cash flows from a swap are s* units of foreign currency at every interim date, and 1 + s* at the end; and the home-currency cash flows from a swap are S, x s units of home currency at every interim date, and S, x (1 + s) at the end. What home-currency cash flows does one receive or pay if each of the foreign-currency cash flows is converted separately into home currency by a forward contract of that specific maturity, rather than exchanging the entire series into a series of home currency cash flows by one single swap contract? Under what conditions on the term structure of returns are the resulting home-currency cash flows of the form (S, x s at the interim dates, and S, x (1 + $) at the end)?Use the 2 factor,-2 goods-2 countries Heckscher-Ohlin model. (i) Describe the production possibility frontier (PPF) for that model. Illustrate, why this model implies that the opportunity costs of a good increase if the production of that good increases. What assumptions are behind this conclusion? (ii) Illustrate the autarky and the free trade equilibrium for a small country that is capital abundant. State the conditions that characterize the competitive equilibrium (both for the autarky and the free trade equilibrium) and give an interpretation of these conditions. (iii) Why does this country gain from trade? Food(i) Describe the basic form of the gravity model that is used to analyse the determinants of bilateral trade flows. (ii) Give a detailed interpretation of the parameters of the gravity model (that are econometrically estimated). (iii) Discuss the most important determinants of bilateral trade flows that are found in the literature.(ii) Illustrate cost minimization under the assumptions of the Heckscher-Ohlin model in one of its sectors. Illustrate the impact of changing factor prices on factor demand and give a short description of the characteristics of the resulting cost functions
