International Macroeconomics Module Code : ECO 00028 M Credits : 10 Term : 2 Contact Hours : 9 two-hour lectures and 4 one-hour seminars ( 22 contact hrs ) Module

Examination Please answer two of the three questions. You can consult any journal articles, working papers, and notes, but I ask you not to discuss these questions with anyone else while you are taking the exam. Please submit the answers to the exam 24 hours after you start it. 1. Consider an economy in which there are two types of goods, primary goods and manufactured goods. Primary goods are homogeneous and are produced using land services and services and land subject to the production function 1/ 2 1/ 2 0 0 0 y t = A Manufactured goods are differentiated by firm using capital services and labor services. There are n firms and the production function for firm j is 1/ 2 1/ 2 max[ , 0]. j j j y k f θ = − A where f is the fixed cost. Suppose that there is a representative consumer with preferences given by the utility function 0 1 log (1/) log n j j c c ρ ρ = + ∑ where 1 0 ≥ > ρ. There is an endowment of t units of land, A units of labor, and k units of capital. a) Suppose that the number of manufacturing firms is variable, that these firms are Cournot competitors, and that there is free entry and exit in manufacturing. Define an (autarkic) equilibrium. Explain carefully how you would calculate this equilibrium (You do not need to calculate it.) b) Suppose now that there are two such countries, one with endowments 1 1 1 (, ,) t k A and and the other with endowments 2 2 2 (, ,) t k A , but otherwise identical. Define a trade equilibrium. c) Suppose that 1 1 2 2 / / t k t k >. Explain what changes you would expect to see in prices, average output levels, and utility levels as these two countries, initially in autarky, open to trade. Explain carefully what patterns of specialization are possible and what pattern of trade you would expect to see. d) Suppose now that the manufacturing firms are Bertrand competitors, redefine the trade equilibrium in part b.