This question looks at the theory of comparative advantage. Imagine a world in which there are just two countries, F and G, and just two goods, X and Y. Consider the following six situations. Each one shows that the two countries can produce for a given number of resources. Assume constant costs. In each case give the (pre-trade) opportunity cost of X in terms of Y. (a) Country F: 10 units of X or 20 units of Y. 1X = ................. Y Country G: 10 units of X or 10 units of Y. 1X = ................. Y (b) Country F: 12 units of X or 12 units of Y. 1X = ................. Y Country G: 6 units of X or 8 units of Y. 1X = ................. Y (c) Country F: 8 units of X or 8 units of Y. 1X = ................. Y Country G: 10 units of X or 10 units of Y. 1X = ................. Y
1) This question looks at the theory of
(a) Country F: 10 units of X or 20 units of Y. 1X = ................. Y
Country G: 10 units of X or 10 units of Y. 1X = ................. Y
(b) Country F: 12 units of X or 12 units of Y. 1X = ................. Y
Country G: 6 units of X or 8 units of Y. 1X = ................. Y
(c) Country F: 8 units of X or 8 units of Y. 1X = ................. Y
Country G: 10 units of X or 10 units of Y. 1X = ................. Y
(d) Country F: 20 units of X or 5 units of Y. 1X = ................. Y
Country G: 18 units of X or 2 units of Y. 1X = ................. Y
(e) Country F: 10 units of X or 8 units of Y. 1X = ................. Y
Country G: 6 units of X or 6 units of Y. 1X = ................. Y
(f) Country F: 2 units of X or 4 units of Y. 1X = ................. Y
Country G: 3 units of X or 6 units of Y. 1X = ................. Y
2) Referring to the six different situations given in Q1, and assuming no transport costs:
(a) In which situations will country F export good X and import good Y? .............................
(b) In which situations will country F export good Y and import good X? ..............................
(c) In which situations will country F export both goods? ..............................
(d) In which situations will country F import both goods? ..............................
(e) In which situations will no trade take place? ...............................
3) In situation (a) in Q1, assume that before trade the price ratios of the two goods were equal to their opportunity cost ratios.
(a) What would the pre-trade price ratio (PX/PY) be in country F? ............
(b) What would the pre-trade price ratio (PX/PY) be in-country G? ...........
(c) Now assume that trade is opened up and that 1 unit of X exchanges for 1.5 of Y.
Demonstrate how both countries have gained.
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4) The following are various methods of intervening in trade:
(i) Tariffs (ii) Quotas (iii) Exchange controls (iv) Import licensing (v) Export subsidies (vi) Embargoes (vii) Administrative barriers
Match each of the above to the following:
(a) A ban on the importation of illegal drugs ..................
(b) A government-imposed restriction on the number of cars that may be imported from Japan .......
(c) The dumping of surplus EU wheat at artificially low prices on the international market. ...............
(d) The exclusion of imports that do not meet rigid safety standards .........
(e) Customs duties on tobacco and alcoholic drinks ..................
(f) A tax imposed by the government on foreign currency deals ..................
(g) The granting of import permits solely to officially recognised importers ..................
5) What is fallacious about the following two arguments? Is there any truth in either?
(a) ‘Imports should be reduced because money is going abroad which would be better spent at home
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(b) ‘We should protect our industries from being undercut by imports produced using cheap labour.’
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6) Explain the WTO’s rules on each of the following:
(a) Non- discrimination
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(b) Reciprocity
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(c) Quotas
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(d) Fair competition
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(e) Tariffs
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