EC 1810 – INTERNATIONAL ECONOMICS

Date : 03/05/2008 Dept. No. Max. : 100 Marks

Time : 9:00 – 12:00

PART- A (5 X 4 = 20 marks)

Answer any FIVE questions in 75 words each. Each question carries FOUR marks.

The current annual interest rate in India is 9% while it is 4% in the UK. The spot rupee-pound exchange rate is Rs.82: £1. Price a one-year forward contract for the rupee-pound exchange rate.

The commodity terms of trade for the following countries are measured taking 2000 as the base year equal to 100. In the year 2005, the terms of trade for Japan, Germany, United States and United Kingdom were 94.8, 91.2, 96.6 and 108.4 respectively. Assuming that there is no change in the index of export prices for Japan and Germany and the index of import prices for the US and UK between 2000 and 2005, estimate the index of import prices for Japan and Germany and the index of export prices for the US and UK.

The free trade price of an imported Nokia cellphone in India is $100. If it is produced in India it requires $80 worth of imported components. India imposes a 25 per cent nominal tariff on each imported Nokia cellphone but a 10 per cent nominal tariff on the imported components. Calculate the rate of effective protection provided to domestic manufacturers of cellphones in India.

PART- B (4 X 10 = 40 marks)

Answer any FOUR questions in 300 words each. Each question carries TEN marks.

Draw a figure showing that even if two nations have identical factor endowments,

technology and tastes, there is still a basis for mutually advantageous trade

between them, if they face decreasing costs in the production of more wheat or

more cloth.

Explain with the help of a diagram how a BOP deficit could be corrected through an exchange rate change in the form of a depreciation or devaluation.

Three multinational car manufacturers, Mercedes Benz, BMW and Volkswagen, are planning to sell assembled models of luxury cars, priced between Rs.35 lakhs and Rs.45 lakhs in the Indian market. Explain the theory that supports their current business moves.

Differentiate between import tariffs, import quotas and voluntary export restraints.

Mention the various components of a nation’s balance of payments. Why is the single entry, Errors and Omissions, often required in a nation’s balance of payments?

The consumers in the UK are willing to pay a maximum price of £4 for a leather handbag. At the free trade price of £1 for each handbag, 70 handbags are demanded locally. If the UK imposes a 100 per cent tariff on each imported handbag, estimate the reduction in consumer’s surplus, the gains to the local producers of handbags, the gains to the British government, and the deadweight loss to British society.

PART- C (2 X 20 = 40 marks)

Answer any TWO questions in 1200 words each. Each question carries TWENTY marks.

What are offer curves? Derive equilibrium terms of trade between the US and the UK using offer curves.

Explain Jacob Viner’s theory of the customs union to show how a customs union contributes to trade creation and trade diversion.

Can a nation that is less efficient than another in the production of all commodities export anything to the latter? Give empirical proof in support of your arguments.