LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034
M.A. DEGREE EXAMINATION – ECONOMICS
FIRST SEMESTER – NOVEMBER 2012
EC 1810 – INTERNATIONAL ECONOMICS
Date : 15/11/2012 Dept. No. Max. : 100 Marks
Time : 1:00 – 4:00
PART- A (5 X 4 = 20 marks)
Answer any FIVE questions in 75 words each. Each question carries FOUR marks.
- State the law of comparative advantage as enunciated by Ricardo.
- How does a customs union differ from a free trade area?
- Define income terms of trade and commodity terms of trade.
- The current short term interest rate in India is 4% while it is 1% in the UK. The spot rupee-pound exchange rate is Rs.79.74: £1. Price a 3 month and a 6 month forward contract for the rupee-pound exchange rate.
- If a country exports $40 million in textiles per year and imports $10 million in textiles per year, estimate the country’s intra-industry trade index for textiles. Explain the significance of this index having a value of either zero or one.
- The free trade price of an imported leather jacket in France is €100. If it is produced locally it requires € 70 worth of imported components. France imposes a 20 per cent nominal tariff on each imported leather jacket but a 5 per cent nominal tariff on the imported components. Calculate the rate of effective protection provided to domestic manufacturers of leather jackets in France.
- Differentiate between trade creation and trade diversion.
PART- B (4 X 10 = 40 marks)
Answer any FOUR questions in 300 words each. Each question carries TEN marks.
- With reference to the table below and assuming that the wage rate per man-hour
is $6 in the US and £1 in the UK
| Commodity | U.S. | U.K. |
| Wheat (bushels/man-hour) | 4 | 1 |
| Cloth (yards/man-hour) | 3 | 2 |
- express Pw and Pc in the US in terms of dollars and in the UK in terms of
pounds in the absence of trade.
- which commodity will the US import and export if the exchange rate
between the dollar and the pound is £1 = $3 ?
- what if £1 = $0.50 , £1 = $2, £1 = $1 ?
- when will trade be balanced between the US and the UK?
- Explain diagrammatically the impact of the RBI’s recent intervention in the foreign exchange market to prevent the rupee from steeply depreciating against the US dollar.
- Discuss the issues plaguing the WTO trade negotiations under the Doha Round.
- The market rate for Indian Rupees is 3% p.a. while that for US Dollars is 8% p.a. (both with continuous compounding). A financial institution enters into a currency swap whereby it receives 4% p.a. in Rupees and pays 7% p.a. in Dollars once a year. The principals in the two currencies are Rs.1200 million and $10 million. The maturity period of the currency swap is 3 years and the current spot exchange rate is Rs.48 = $1. Determine the value of the currency swap in dollars.
- Compare foreign exchange options with foreign exchange forwards and futures.
- Define the concept of balance of payments. How are the following transactions entered into the US balance of payments?
- a) The US gives $200 cash aid to the government of India.
- b) India uses the cash aid to import $200 worth of machinery from the US.
- c) If the above two transactions occur during the same year, how will they be
reflected in the US balance of payments?
- Differentiate between Currency Board Arrangements and Dollarisation. Illustrate your answer with suitable examples.
PART- C (2 X 20 = 40 marks)
Answer any TWO questions in 1200 words each. Each question carries TWENTY
marks.
- Explain the Stolper-Samuelson theorem and show how the Metzler paradox is an exception to this theorem.
- Describe the salient features of the European Union as a good example of economic integration.
- Discuss the Heckscher-Ohlin model of international trade. What did Leontief discover by testing this model empirically?
- With the help of a diagram explain the IS-LM-BP model with flexible exchange rates and perfect capital mobility.
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