Question

Problem I. True or False. Please support your answers with proper reasoning, mathematical arguments, or graphs. (15 points, 3 points each) 1. Growth in labor and capital as inputs of production in a small country lead to respectively ambiguous and positive welfare effects for the average person of a country. 2. FDI in a small, open, labor-scarce country has an ultra-protrade production effect. 3. According to Rybczynski theorem, factor growth results in either an ultra-protrade or ultra-antitrade production effect. 4. Eurasian Union is an economic union as well as a monetary union. 5. Benefits of FTA are higher if the country has elastic demand and inelastic supply curve.

Answer 1

Problem 1:

1.) True

Growth in the labour of a small country can cause increase in the output level, but since it is a small country, the growth in output might not be enough to increase standard of living of the entire population. Hence, it is an ambiguous effect. On the other hand, increase in capital makes it possible for each worker's productivity to increase, so it has definitive positive effects on the per capita gdp.

2.) False

If the labour is scarce, then increasing capital is not going to increase output endlessly. There is diminishing returns to capital, which means indefinitely increasing capital without increasing labour will not produde ultra-protrade effects on the economy.

3.) True

If a country exports a capital intensive commodity, and if the capital increases in the country, then the effect will be protrade as the output of the capital intensive commodity will increase and that of the labour intensive commodity will reduce. If the labour increases in the country, then the effect will be antitrade as the output of the labour intensive commodity will increase and that of the capital intensive commodity will reduce.

4.) True

Eurasian Union is an economic as well as a monetary union with the same common currency.

5.) True

If a country has elastic demand, then the demand changes more (increases more) when the price of the commodity reduces due to reduction in the tariffs. Hence, the welfare of the consumers increases. Since the supply is inelastic, the domestic production will not reduce as much, which means the welfare of the domestic producers will not reduce more. Hence, the overall welfare will increase.

(Please consider posting as separate questions.)