INTERNATIONAL TRADE ASSESSMENT

INTERNATIONAL TRADE FINAL ASSESSMENT
SEMESTER 1, 2021
This assessment has a total 50 marks. Please answer all three questions and follow the instructions very carefully, in particular, pay particular attention to word limits in your explanations. Explain your answers concisely and in a clear way. In addition to word limits, your assignment in total cannot exceed four pages. There will be a penalty imposed if you go beyond four pages.
SECTION A
QUESTION 1.
Consider the Ricardian model with two countries, Home and Foreign, and two goods, X and Y. If Foreign workers have a higher real wage than Home workers and Home country has a comparative advantage in good X, we can conclude that:
* Foreign country has absolute disadvantage in good Y.
* Home country has absolute disadvantage in good X.
* Foreign country cannot benefit from trade with Home country.
* If trade is allowed, in Foreign country, those labours that are employed in the production of good X will lose from trade whereas the ones employed in the production of good Y will gain from trade.
(1 mark)
Explain your answer clearly. Limit your explanation to 200 words.(4 marks)
Comparative advantage is the ability to produce a good at a lower opportunity cost. Absolute advantage is the ability to produce a good using fewer inputs where there is a lower cost of production (cost efficiency) when measuring the cost for the quantity of inputs. The labor productivity difference determines comparative advantage. Low cost increases competitiveness, and since foreign workers have a higher real wage, the foreign workers will become less competitive.
QUESTION 2.
Consider the specific-factors model with 2 goods: manufacturing and agriculture. Manufacturing requires labour and sector-specific capital, while agriculture requires labour and sector-specific land. Labour is freely mobile across sectors. The government is considering imposing an import tariff on agricultural products. Which of the following is true?
* The relative price of agricultural products will go down.
* Capitalists will support this initiative.
* Agricultural production will increase.
* Marginal product of labour will decrease in manufacturing.
(1 mark)
Explain your answer clearly. Limit your explanation to 200 words.(4 marks)
The price of imported agricultural products increases because tariff consumers will shift their demand from foreign to domestic agricultural suppliers. The higher demand will allow domestic producers an opportunity to raise output and prices. There is an inverse relationship between the demand for labour and the wage rate. Labor is mobile across the manufacturing and agriculture sectors. The marginal product of labour is an additional amount of output produced when there is an increase in the unit of labor. There will be a higher demand for labor in the agricultural sector and not the manufacturing sector.
QUESTION 3.
Assume that there are three industries in the Home country: industry A, industry B and industry
C. Total labour force of the Home Country in the year 2015 was 75,000. 25,000 of this labour force were employed in industry A, 25,000 of it were employed in industry B, and the rest were employed in industry C. In year 2016,...