INTERNATIONAL TRADE

1. Using data from Brazil and El Salvador, calculate the correlation coefficient
(using CORREL command in excel) between Openness and the GINI Index for
each nation. Report and interpret this relationship in up to 100 words. [Hint: the
GINI is often used as a proxy for the ratio of skilled to unskilled wages in
empirical studies]. (5 marks)
2. Using a diagram for substitutable inputs case, explain in up to 100 words the
Stolper-Samuelson theorem. (5 marks)
3. Assume that both Brazil and El Salvador are unskilled-labour abundant countries.
Based on your findings in Question 1, explain in up to 100 words whether your
data agree or disagree with the Stolper-Samuelson theorem. (5 marks)
4. Consider the Ricardian model given in Question 3 of Assignment 1.
(a) Derive the relative demand curve relating the relative demand for Wallet to
the relative price of Wallet. Do this algebraically, and then show what the
curve looks like in a diagram (put the relative price of Wallet on the vertical
axis and the relative quantity of Wallet on the horizontal axis). (2 marks)
(b) Derive the world relative supply curve of Wallet. (2 marks)
(c) Put in the same figure the relative demand curve for Wallet that you found in
part (a) and the world relative supply curve of Wallet that you found in part
(b). Determine the equilibrium relative price of Wallet and the equilibrium
relative quantity of Wallet under free trade. (2 marks)
(d) Under free trade, which country produces which good(s)? How many units?
(2 marks)
(e) Who gains from trade? Who loses from trade? State labours’ stance towards
free trade in each country. (2 marks)

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