School of Economics Main Series UG Examination 2014-15
ECONOMICS OF INTERNATIONAL TRADE AND INTEGRATION
ECO-5003Y
Time allowed: 3 hours
Answer ALL questions in Section A. Section A is worth 40 marks. Answer TWO questions in Section B. Section B is worth 30 marks. Answer ONE question in Section C. Section C is worth 30 marks.
Notes are not permitted in this examination.
Section A.
Answer ALL questions from Section A, representing a total of 40 marks.
1. Consider the information given in the table below which shows the unit labour requirements for two countries – the UK and CHINA:
MACHINERY CLOTH
UK 5 (hours) 2 (hours)
CHINA 3 (hours) 3 (hours)
The UK has 1000 hours of labour available. CHINA has 1200 hours of labour available.
(a) Draw the production possibility frontier for the UK and for CHINA.
[8 marks] (b) What is the autarky relative price of CLOTH in terms of MACHINERY in the UK?
[4 marks] (c) What is the autarky relative price of CLOTH in terms of MACHINERY in CHINA?
[4 marks] (d) Assume that the UK and CHINA engage in free trade with each other and that the free trade price of CLOTH in terms of MACHINERY is 4/5. Using this price show that the UK is better off under free trade than under autarky.
[4 marks] 2. The following text is an extract from a recent European Commission Press
Release, relating to the joint control of a Czech airline by two companies. (a) Evaluate the potential anti-competitive effects on cross-border trade investigated by the European Commission in this case.
[8 marks] (b) Discuss the main objectives and regulations underlying EU competition policy.
EUROPEAN COMMISSION © PRESS RELEASE EXTRACT Brussels, 19 December 2014
Mergers: Commission approves acquisition of joint control over Czech national carrier České aerolinie by Travel Service and Český
Aeroholding
The European Commission has approved under the EU Merger Regulation the proposed acquisition of joint control over České aerolinie ("CSA"), the Czech national air carrier, by Travel Service and Český Aeroholding ("CAH"), all of the Czech Republic. The Commission found, in particular, that
passengers would continue to have a number of alternative suppliers for their flights to and from Prague airport.
CSA and Travel Service, which operates and markets scheduled passenger flights under the brand Smartwings, have their hub at Prague airport. The Commission's investigation confirmed that the proposed transaction would not lead to any anticompetitive effects on the market for air transport of
passengers as CSA and Travel Service will continue to face sufficient
competitive pressure from other carriers on the overlapping routes which are all out of Prague airport. The Commission's investigation also confirmed the absence of any anti-competitive effects resulting from the relationship
between CAH's activities in ground handling, fuel supply, maintenance, repair and overhaul services and CSA's and Travel Service's air transport
operations. Indeed, the companies will have no incentive to shut out
competitors from access to CAH's services, because the interests of CAH and Travel Service are not identical and their benefit from such strategies, if any, will be very limited.
The Commission therefore concluded that the transaction would not raise any competition concerns in the European Economic Area (EEA).’
Section B.
Answer TWO questions from Section B, representing a total of 30 marks.
3. Describe the main features and the results of the Heckscher-Ohlin model of international trade.
[15 marks] 4. Consider the case of a small country in the context of the Specific Factors model. There are only two sectors in this economy — agriculture and manufacturing. Assume that land is specific to agriculture, capital is specific to manufacturing, and that labour is used in both sectors and is free to move between the two sectors. Suppose that there is natural disaster in this country that decreases its population and reduces a sizeable portion of the labour force. Using a diagram, examine the impact of this decrease in the workforce on the output of each industry and on the equilibrium wage. What happens to the rentals on capital and land?
[15 marks] 5. What are the external and internal economies of scale? What are the reasons for the emergence of external economies of scale?
[15 marks] 6. Using an appropriate diagram, analyse the effect of a specific tariff on imports on the welfare of a country imposing the tariff. Assume that the country imposing the tariff is a small country.
[15 marks] 7. What are the disadvantages of engaging in strategic trade policy even in cases where it can be shown to yield an increase in a country’s welfare?
[15 marks] Section C
Answer ONE question from Section C, representing a total of 30 marks. 8. Illustrate the way in which the better investment climate promoted by integration within a regional trade agreement can increase economic growth in both the medium and the longer term.
[30 marks] 9. To what extent can the Common Agricultural Policy protect individual European countries from the adverse effects of Russian sanctions on their agricultural exports?
how could the latter be averted in a single currency area?
[30 marks] END OF PAPER