International Economics

Answer all questions for 40 points. You must note that the questions require the use of economic models.

Q1(a). Utopia is a capital-intensive nation. It originally produced 40k machines and 10 tons of bananas, but consumed 20k machines and 30 tons of bananas. What are its terms of trade? (5 points).

(b) Suppose Utopia can attract a windfall of capital inflows to produce 50k machines and 20 tons of bananas; what is its new terms of trade if it can consume 10k machines and 25 tons of bananas? (5 points).

(c) Briefly explain what has happened to its terms of trade in terms of improvement or deterioration? (5 points).

(d) Alluding to any two countries, briefly provide historical and economic contexts for what might have happened in Utopia. (5 points)
Q2(a): Illustrate and discuss the idea that dynamic international trade can bring about relative factor price equalization (5 Points).

(b) Refer to US trade in goods with Canada and/or Mexico for the past 5 years and review the literature on relative factor cost. Have the trading countries experienced the equalization or divergence of relative factor costs (in terms of the ratio of any two inputs)? Why? (15 Points).

NB: Q2(b) requires citations of scholarly sources