Q(1) : - Suppose that the autarky price of commodity x is $ 10 in Nation A, $8

in Nation B, and $ 6 in Nation C, and that Nation A is too small to affect

prices in Nation B or C by trading. If nation A initially imposes a

nondiscriminatory ad valorem tariff of 100 percent on its imports of

commodity X from Nations B and C, will Nation A produce commodity X

domestically or import it from Nation B or Nation C?

Ans:- If nation A imposes Ad valorem tariff on commodity x. In that case

Nation A will produce commodity x Domestically because the price of

commodity x is $10 in Nation A & Its price is $16 When it imports from

Nation B and Its price is $12 when It import from Nation C. This is due to

100% ad valorem Tariff impose by Nation A on import of commodity x.

Due to ad valorem Tariff price of commodity X

is more in nation B and C as compare to Nation A. So It is better for Nation A

to produce commodity X domestically rather Then importing it from Nation B

and Nation C.

Q(2):- The Karma computer company has decided to open a Brazilian

subsidiary. Brazilian import restrictions have prevented the firm from the

selling into that market, while the firm has been unwilling to sell or lease its

patents to Brazilian firms because it fears this will eventually hurts its

technological advantage in the US market. Analyze the Karma’s decision in

terms of the theory of multinational enterprise.

Ans:- Multinational exists because It turns to be more profitable to carry out transactions Within a firm rather than between firms. There are advantages of internalization for technology & transfer. If a firm instead of selling technology to foreign firms, sets up foreign subsidiaries and keep info within the firm. It would be easier to protect rights.

There are advantages of internalization for vertical integration. If one (upstream) firm produces a good that is used as An input

for another (downstream) from then problems of coordination will appear due to Uncertainty of demand or supply.

Q(3):- Show the following information diagrammatically using offer curves

and using your own figures, wherever necessary. India and Germany are

trading partners. India exports cloth to Germany and imports machines.

Equilibrium is established where terms of trade are equal to 1 for both

nations at 70 million units. Germany levies a 100% ad valorem tariff on

imports from India. Show the change in terms of trade. India responds with

a retaliatory tariff. Again show where equilibrium is established after the

retaliatory tariff. In this context explain what an optimum tariff is?

Ans:- Ans. The optimum tariff is that ate of tariff that maximizes the net benefit resulting from reduction in the volume of trade. That is starting from free trade position as the nation increases its tariff rate, its welfare increases up to the maximum and declines as tariff rate increases.

As Germany and India are trading partners Germany imposes ad valorem tariff on the imports from India which is not an exactly favorable position from India that’s why India on the counter part imposes retaliatory tariff on Germany to make its condition better.

Q(4):- Which of the following are direct foreign investments, and which are

not?

A. A Saudi businessman buys a $ 10 million of IBM stock.

B. The same businessman buys a New York apartment building?

C. A French company merges with an American company; stockholders in

the US Company exchange their stock for shares in the French Firm.

D. An Italian firm builds a plant in Russia and manages the plant as a

contractor to the Russian government.

Ans:- Foreign direct investment is that investment, which is made to

serve the business interests of the investor in a company, which is in a

different nation distinct from the investor's country of origin.

Direct Investment Which are and which are not:-

(A)A Saudi Business man buys a $10 million IBM stock is- It is Not a Direct Investment.

(B)The same business man buys a Apartment in New York is- It is a Direct Investment.

(C)A French company emerges With an American company stock holders in the US exchange their stock for shares in the French firm is- It is Not a Direct Investment.

(D) An Italian firm builds a plant in Russia and manages the plant as a contractor to the Russian government is- It is a Direct Investment.

Q(5):- Under what conditions is the formation of a customs union more likely

lead to trade creation and increased welfare?

Ans. A custom union is more likely to lead to trade creation and increased welfare under the following conditions:

a) The higher are the reunion trade barriers of member countries. There is then a greater probability that formation of the custom union will create trade among union members rather than divert trade from nonmembers to members.

b) The lower are the customs union’s barriers on trade with the rest of the world. This makes it less likely that formation of the customs union will lead to costly trade diversion.

c) The greater is the number of countries forming the customs union and the larger their size. Under these circumstances, there is a greater probability that low-cost Producers fall within the unions.

d) The more competitive rather than complementary are that economies of member nations. There are then greater opportunities for specialization in production and trade creation with the formation of the customs union. Thus, a customs union is more likely to increase welfare if formed by two competitive industrial nations rather than by an industrial nation and an agricultural (complementary) nation.

e) The closer geographically are the members of the customs union. Then transportation costs represent less of an obstacle to trade creation among members.

f) The greater is the pre-union trade and economic relationship among potential Members of the customs union. This leads to greater opportunities for significant welfare gains as a result of the formation of the customs union.

Q(6):- Draw a figure showing what happens if country A forms a customs

union with country C only, though free trade price of the commodity

imported from country B is $2.Country A levies a 100% ad valorem tariff on

imports from country B. The prices of the commodity are summarized as

under:

Free Trade price-$2

Ad valorem tariff -100%

Import price from country C-$3.

Give a real life example of such a customs union.

Ans:- Ans. Custom union is existing between country A and C. thus free trade will be exist between country A and C. Because Country A and C is a part of custom union. A levies 100% ad valorem tariff on imports from country Band the free trade price is $2 but not applicable with country B because country B is not a part of custom union with country A. when A imports from the country B imposed 100% ad valorem tariff It become $4 due to 100% ad valorem tariff.

Q(7):- Analysis the effect of foreign investments on the national income of

the Investing and Host Nations taking any two countries as examples?

Ans: EFFECT OF FOREIGN INVESTMENTS ON NATIONAL INCOME :

The effect of foreign investments on both the investing and host countries results from different rates of taxation & foreign earnings in various countries. While the investing country that is U.S as a whole gains from investing abroad, there is a redistribution of domestic income from labor to capital. It is for this reason that organized labor in the United States is opposed to U.S investments abroad. On the other hand, while the host country also gains from receiving foreign investments, these investments lead to a redistribution of National income from capital to labor.

INVESTING AND HOST COUNTRY

EX:-If corporate taxes are 40 percent of earnings in the united states but only 30 percent in England. It is only natural for U.S firms to invest in England or reroute foreign sales through subsidiaries there in order to pay the lower tax rate. The United States would collect a tax of only 10 percent on foreign earnings (difference between the domestic tax rate of 40 percent and the foreign tax rate of 30 percent) when foreign earnings are repatriated.

As a result, the tax base and the amount of taxes collected decline in (investing country) United States an rise in the (host country) England.

Q(8):- Discuss the BOP position of any one of the following nations, stating

whether the nation has a surplus or deficit in its current account and capital

account.

(1) US

(2) India

(3) Japan

Ans:- INDIA’S BOP : India’s presently has a deficit in its current account of

Bop, which has Increased substantially after reforms in 1991. In 1991- 92

Current Account Deficit was $1,178 million, which rose to $17,403 million in

2007-08 and accounted for $36,469 million for last three quarters of 2008.

One of the Major Factor for increasing current Account deficit in last few year

has been a rising oil import bill.

India has done fairly well on the capital account side. In

2007-08 It had a capital account surplus of $108,031 billion. India’s overall

current account & capital account deficit is $20,380 million for April-

December 2008, which is expected to rise to a figure between $25 and 30

billion by the year ending march 31, 2009.

Q(9):- Taking the case of any one developing country in Asia, Africa or Latin

America, explaining how the country has gained from International trade and

the economic instability resulting, if any from exposure to international

markets.

Ans:- International trade:- Singapore has adopted a policy of export-

oriented industrialization, promoting the export of goods and services in the

international markets. It has few barriers against the import of goods and

services, although the government's well-known interventionist policy in the

regulation and ownership of many Singapore companies has been widely

criticized.

Singapore more than doubled its exports, from US$52.752

billion in 1990 to US$118.268 billion, in 1995. Exports dipped after 1997, but

recovered to reach US$137 billion in 2000. The United States is Singapore's

single largest trading partner, accounting for 19 percent of all exports in

1999, primarily from the sale of manufactured electronics and computer

peripherals. A large part of these exports originates from U.S.-owned

companies, which are traditionally the largest investors in the Singapore

economy.

Trade (expressed in billions of US$): Singapore

Exports

Imports

1975 5.375 8.133

1980 19.376 24.007

1985 22.812 26.285

1990 52.752 60.899

1995118.26

8 124.507

1998109.89

5 104.719

Singapore's government considers the development of free trade as an

important factor for the country's future economic growth. Singapore

strongly supported free trade negotiations between the members of the Asia

Pacific Economic Cooperation organization (APEC), which tried to remove

trade barriers between member countries, including the United States,

Canada, Japan, Australia, and others. Singapore also strongly supported the

creation of a regional free trade zone for the Association of South East Asian

Nations (ASEAN), to be known as the ASEAN Free Trade Zone (AFTA). In

2001, Singapore announced its intention to discuss bilateral free-trade

arrangements with Australia, Canada, Japan, and the United States.

ECONOMIC INSTABILITY:- investigates the time series relationship between export earnings instability and instability in receipts from international tourism for Singapore between 1972 and 1988. Computes four standardized instability indexes for both merchandize exports and international travel receipts, having suitably adjusted the official export series for re-exports and corrected the two data series for trend.

There is some support for the view that export receipts are more unstable than tourism receipts. Although exports are generally more unstable over

the whole period, they were relatively more unstable in the early to mid-1970s during a period of international instability. Tourism receipts, on the other hand, were relatively more unstable in the 1980s, partly as a result of world recession, but also because of structural problems in the tourism industry in Singapore. Also finds that the development of the tourism sector in Singapore has exerted a net destabilizing effect on total exports of goods and services.

Q(10):- Write a note on India’s trade Deficit or Surplus With Any Trading Partner ?

Ans:- China become India’s second largest trading partner. India enjoyed a comfortable trade surplus of $1.75 billion, according to Chinese custom statics. It growth remains at current levels, India china trade could cross $17 billion.

India’s annual trade surplus with china widened rapidly. Before2005 India’s trade deficit with china was about $0.2 billion on average, never exceeding $0.4 billion. In 2006 India’s trade deficit with china was converted to a surplus of $0.91 billion. In 2008 Indian Exports to china grew by 80.5 % to reach $7.68 billion while India’s imports from china registered a 77.2 % year on year growth to hit $ 5.93 billion.

India was the ninth largest trading partner of china in Asia in 2008. Monthly trade volume between India & china recorded in December stood a yearly high of $1.44 billion, surpassing November’s high of $ 1.32 billion.