2. [Case Study from India\'s Trade Liberalization (30 points)] Please answer the
ID: 1137874 • Letter: 2
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2. [Case Study from India's Trade Liberalization (30 points)] Please answer the following questions based on the article, Petia Topalova (2010) "Factor Immobility and Regional Impacts of Trade Liberalization: Evidence on Poverty from India", American Economic Journal: Applied Economics, 2(4), pp.1-41. 2.1. [5 points] We studied that the Indian government reduced tariffs substantially in 1991. Please explain why it introduced the huge tariff cuts using the following four key words. Key words: The First Gulf War, Remittance, IMF, Washington Consensus 2.2. [5 points] Petia Topalova examines the impact of the tariff cuts on poverty reduction. .Please explain the World Bank's definition of poverty .Answer the name of the Nobel Prize Lawrence who proposed definitions of poverty. 2.3. [10 points] Please summarize Petia Topalova's findings by showing key numbers. 2.4. [10 points] Please explain her findings by employing a Specific-Factors Model with two industries, a liberalizing industry A and a non-liberalizing industry B. You are expected to draw a figure and verbally explain the figureExplanation / Answer
2.1 During late 1980's when India turned towards export led growth, only 12% of manufactured goods could be imported under an open general license and the average tariff was still greater than 90%.
The fiscal and current account imbalances grew at this time when the first Gulf War led to increase in oil prices, dropping of remittances and shirnking of demand from important trading partners. India then turned to IMF and negotiated a Stand-By-Arrangement in 1991.
Due to IMF's conditional support, India had to focus on macroeconomic stabilization and structural reforms which led to reduction in level of tariffs (average tariff fell from 80% in 1990 to 37% in 1996) and a removal of large number of quantitative restrictions ( fell from 87% to 45%).
2.2
2.3 Petia Topalova's findings showed the effect of India's opening to international trade in 1991 on poverty and consumption growth.
2.4
In an economy with two industries, a liberalizing industry A and a non-liberalizing industry B, suppose that price of goods of trade liberalizing industry rises, then the industry whose price rises is the export sector.
The price increase would lead to -
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