1 Using Heckscher-Ohlin theory and the following table on relative factor abundance, what is the predicted impact of China’s accession to the WTO 1999 on its trade with the US (i.e. which type of goods will be traded and in which direction)?  Please explain (no computations needed) your answer (cite the appropriate theorem(s) and give examples) using not more than 300 words.   [20]

Approximate share of country factor endowment

of world factor endowments, early 2000s

2 Suppose a limited number of WTO member countries consider en- tering a customs union with zero tariffs within the union and com-mon tariffs on imports from countries outside of the union. What will be the consequence for aggregate trade and welfare in the world in-crease or decrease? Explain two different effects of the new customs union using the gravity model and not more than 300 words.     [20]

3 Suppose there are two countries, Home and Foreign, and two goods, clothes and grain, both produced only using labour.  Unit labour costs are constant and given by ac(H)  = 1 and ag(H)  = 2 in Home, and ac(F)  = 3/2 and ag(F)  = 3/2 in Foreign, where subscript c stands for clothes and g for grain. Both countries have the same labour force

L.  There is free international trade of goods at prices pc  and pg , and demand for good i = c, g in country j  = H, F is given by xi(j)  = Yj /(2pi ), where Yj  denotes the aggregate income in country j .

In the free trade world market equilibrium pc = 1 and pg  = 3/2.

a) Determine the production and imports and exports in each coun-try.                   [10]

b) Home considers introducing a trade tariff τ on grain. The revenue from the tariff is to be redistributed equally among consumers in Home. Determine the qualitative effect on trade of a small tariff τ (so that new equilibrium prices will be close to the old ones).                                              [10]

c) Now Home considers a quota on grain imports instead of a tariff, to protect the domestic grain producers. Determine the qualita-tive effect of an import quota qg  < L/3 on grain on the prices for grain and labour in Home.  Will the quota increase welfare in Home?                                                                               [10]