International Trade and Policy

Instructions:
Whenever appropriate, use graphs and equations to support your answer, and make sure you label all graphs clearly. Always show your steps so that partial credits can be awarded. It is important for you to outline your arguments and explain your answers thoroughly.
You have to submit typed responses. Include images of algebra/formulae or graphs.
Where relevant, questions include word limits. These are limits, not targets. Excellent answers can be shorter than the word limit. If you go beyond the word limit the additional text will be ignored. Where a question includes a word limit you HAVE to include a word count for your answer (excluding formulae). You could use https://wordcounter.net to obtain word counts.
If you wish, and it is not a requirement, you can support your answers with journal articles and reports either covered or not covered in class. Make sure to include a reference section if you choose to include other papers in your answer. The reference section will not count towards the word limit.
You will work in the assigned group. Each group only has to write up one piece of work. Make sure you put only your student IDs (no names), your group name/number on the front page.
EACH member MUST submit your assignment to Turnitin by the deadline, otherwise a standard late penalty will be applied by the UG office and marks will be deducted accordingly.

A NO TOLERANCE TOWARDS PLAGIARISM WILL BE APPLICABLE. IF FOUND GUILTY WILL LEAD TO EXPULSION.

This question is related to the findings in the following paper:
Manova, Kalina. (2008) “Credit constraints, equity market liberalizations and international trade.” Journal of International Economics, 76(1): 33-47.
You can access the attached “ARTICLE” Manova (2008) studies empirically in her paper whether credit constraints (facing producers) are an important determinant of international trade. Her empirical strategy uses measures on an industry’s dependence on external finance, and see if these capital-dependent sectors have a higher exports in countries where their equity market is liberalised.
Unless otherwise noted, all assumptions of the standard Heckscher-Ohlin model apply. If you prefer to give more context, you can make and state assumptions on the structure of the economy (e.g. goods and factors) in your answers, as long as it is consistent with the model assumptions.

(a) Manova (2008) also controlled for other variables in her estimation equation in Table 3, namely, interaction terms of country’s relative endowment in capital, human capital, and natural resources, with the respective factor intensities for each industry. Are these findings consistent with the Heckscher-Ohlin Model? Why or why not?(max. 400 words; 8 points)
(b) Suppose that a country proposes to reform its financial sector in order to reduce the cost of capital. Following the results in Manova (2008), who do we expect to benefit or lose from this sector reform? Defend your answers thoroughly.(max. 1000 words; 17 points)

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