Economics 2023 Paper I 50 marks Calculate

Q6

(a) Consider the market for good X for Country 1 and Country 2. The supply and demand functions for Country 1 are given as P = Q + 70 and P = 170 – Q, while that of Country 2 are given as P = 10 + Q and P = 110 – Q. Assume that there are two countries in the world and trade is balanced. Free trade price is stabilized in between autarky prices of both the countries. Based on the above information, answer the following questions: (i) From the free trade price and zero transportation cost, if the importing country imposes an import quota of 50 units, determine the quantity of good X produced and consumed. Calculate the consumer and producer surplus and protection cost due to import quota. (ii) From the free trade price, assume that the importing country is small and consider an import tariff of Rs. 10 per unit on good X. Calculate the impact on consumer surplus, producer surplus and government revenue. Does this policy increase national welfare? (20 marks) (b) "A continuous process of innovation and invention would give rise to trade even between countries with similar factor endowments and tastes." Examine the statement. (15 marks) (c) Examine the significance of external economies and product variety in the context of international trade theory. (15 marks)

हिंदी में प्रश्न पढ़ें

(a) वस्तु X का बाजार देश 1 तथा देश 2 में है। देश 1 में पूर्ति व माँग फलन क्रमशः: P = Q + 70 तथा P = 170 – Q है जब कि देश 2 में पूर्ति व माँग फलन क्रमशः: P = 10 + Q तथा P = 110 – Q है। मान लीजिए कि विश्व में केवल ये दो देश ही हैं तथा उनका व्यापार संतुलित है। स्वतंत्र व्यापार कीमत दोनों देशों के व्यापार से पहले की कीमतों के मध्य स्थित होगी। उपर्युक्त सूचना को संज्ञान में लेते हुए, निम्न प्रश्नों का उत्तर दीजिए: (i) स्वतंत्र व्यापार कीमत एवं शून्य परिवहन लागत पर, यदि आयातक देश 50 इकाइयों का आयात-अभ्यर्थ लगाता है तो वस्तु X के उत्पादन एवं उपयोग की मात्रा ज्ञात कीजिए। आयात-अभ्यर्थ लगाने से उपभोक्ता अतिरेक, उत्पादक अतिरेक तथा संरक्षण लागत आगणित कीजिए। (ii) यदि आयातक-देश छोटा है तथा स्वतंत्र-व्यापार कीमत पर वस्तु X पर 10 रु. प्रति इकाई का प्रशुल्क लगाता है तो इसका प्रभाव उपभोक्ता-अतिरेक उत्पादक-अतिरेक तथा राजकीय-आगम पर ज्ञात कीजिए। क्या यह नीति राष्ट्रीय कल्याण में वृद्धि करती है? (20 अंक) (b) "नवाचार व आविष्कार की सतत प्रक्रिया से उन देशों के बीच भी व्यापार प्रारम्भ हो जाता है जिनकी कारक निधियां तथा रुचियां समान हैं।" कथन का परीक्षण कीजिये। (15 अंक) (c) अन्तर्राष्ट्रीय व्यापार सिद्धान्त के सन्दर्भ में, बाह्य मितव्ययिताओं तथा उत्पाद विविधता के महत्व का परीक्षण कीजिए। (15 अंक)

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Directive word: Calculate

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Approach

Calculate the autarky and free trade equilibria first, then solve the quota and tariff scenarios systematically. For part (a)(i)-(ii), derive all numerical values step-by-step with clear algebraic working. For part (b), examine Krugman's new trade theory and product cycle models. For part (c), analyze external economies (Marshallian) and intra-industry trade through the lens of India's IT clusters and consumer goods diversity. Allocate approximately 40% time to the 20-mark quantitative section, 30% each to the 15-mark theoretical parts.

Key points expected

  • For (a): Calculate autarky prices (Country 1: P=120, Q=50; Country 2: P=60, Q=50), identify Country 2 as importer, determine free trade price P=90 with trade volume 60 units
  • For (a)(i): With quota of 50 units, solve for new domestic price in Country 2 using import demand=50, find P=95, calculate CS loss, PS gain, and deadweight loss/protection cost
  • For (a)(ii): With specific tariff of Rs.10, new price becomes 100, calculate changes in CS, PS, government revenue, and demonstrate welfare loss for small country case
  • For (b): Examine Krugman's new trade theory, Lancaster's love-of-variety, and Vernon's product cycle; explain how innovation creates comparative advantage endogenously despite similar factor endowments
  • For (c): Discuss external economies (specialized labor pools, supplier networks, knowledge spillovers) and product variety as sources of trade; link to India's software clusters (Bangalore) and consumer preference for variety

Evaluation rubric

DimensionWeightMax marksExcellentAveragePoor
Concept correctness20%10Correctly identifies Country 1 as exporter and Country 2 as importer based on autarky prices; accurately applies small country tariff assumption; correctly distinguishes between quota rent and tariff revenue; for (b) and (c), precisely defines external economies, economies of scale, and intra-industry trade with appropriate theoretical references (Krugman, Lancaster, Ethier)Correctly identifies trading pattern but makes minor errors in welfare calculations; conflates quota and tariff effects partially; for theoretical parts, mentions relevant concepts but with imprecise definitions or missing key theoristsMisidentifies which country imports/exports; confuses specific and ad valorem tariffs; fundamental errors in surplus calculations; for (b)-(c), vague or incorrect theoretical exposition with no named economists
Diagram / model20%10Draws clear supply-demand diagrams for both countries showing autarky and free trade equilibria; separate diagrams for quota (showing license holder rent) and tariff (showing government revenue); for (b)-(c), includes Krugman-style monopolistic competition diagram or product cycle curve; all diagrams properly labeled with prices, quantities, and welfare areas shadedDraws basic two-country trade diagram but omits quota-specific features or mislabels welfare areas; for theoretical parts, generic diagrams without specific model features; labels partially completeNo diagrams or completely incorrect diagrams; failure to distinguish partial equilibrium trade effects from general equilibrium; missing diagrams for theoretical sections
Quantitative reasoning20%10Step-by-step algebraic derivation: autarky equilibria (P1=120, Q1=50; P2=60, Q2=50), export supply/import demand functions, free trade price P=90 with 60 units traded; for quota: solves P=95, Qd=65, Qs=45, CS loss=2875, PS gain=2375, DWL=500; for tariff: P=100, CS loss, PS gain, revenue=500, net welfare loss; all calculations verifiable and units specifiedCorrect free trade price but arithmetic errors in quota/tariff scenarios; correct formulas for surplus changes but calculation mistakes; partial working shown making verification difficultIncorrect autarky prices; failure to set up import demand/export supply curves; no systematic derivation; wild guesses or completely wrong numerical answers; missing units or confusing price and quantity
Indian / empirical examples20%10For quota/tariff: references India's QR removal under WTO (1991-2001) or current tariff structures; for (b): cites India's pharmaceutical innovation or IT services trade with similar-income countries; for (c): specific examples like Bangalore's software cluster (external economies) or India's two-wheeler variety explosion post-liberalization; empirical data or policy references with datesGeneric mention of India's trade policy without specifics; vague reference to 'IT sector' or 'manufacturing clusters' without naming locations or policies; no empirical dataNo Indian examples; or irrelevant examples (e.g., agricultural subsidies for innovation question); factually incorrect claims about India's trade regime
Policy implication20%10Critically evaluates why quotas are now prohibited under WTO (rent-seeking, corruption) versus tariffs' transparency; for small country, explains why unilateral free trade is optimal; for (b)-(c), discusses policy implications: R&D subsidies, IPR protection, cluster development policies (SEZs, STPIs), and their limitations; balanced assessment of infant industry protection versus opennessStates that tariffs/quotas reduce welfare without explaining why small country case differs from large; mentions SEZs or Make in India without analytical linkage to theoretical concepts; one-sided viewConcludes protection is good/bad without nuance; no policy recommendations for innovation or cluster development; confused welfare analysis suggesting tariffs raise national welfare for small country

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