Student Number: (enter on the line below)
Student Name: (enter on the line below)
HI5016
INTERNATIONAL TRADE AND ENTERPRISE
FINAL ASSESSMENT
TRIMESTER T1, 2021
Assessment Weight: 50 total marks
Instructions:
• All questions must be answered by using the answer boxes provided in this paper.
• Completed answers must be submitted to Blackboard by the published due date and time.
Submission instructions are at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of knowledge of the key topics covered in this unit
Question 1
( 7 marks)
The Gravity Model
1. “The gravity model of international trade is able to predict trade flows between two countries based on two principal factors.”
Describe the gravity model – specify the variables, use an example of Canada and the USA, or Mexico and the USA – both situations where the gravity model has been found to be accurate.
ANSWER: ** Answer box will enlarge as you type
Question 2
(7 marks)
Absolute and Comparative Advantage
2. Assume a world of two nations USA and Australia. The two nations produce machinery and agriculture. The USA can produce 160 units of machinery or 200 units of agriculture while Australia can produce 140 units of machinery or 50 units of agriculture, in the same time period.
a. Define “absolute advantage” (1 mark)
b. Which country, Australia or USA, has an absolute advantage in the production of agriculture and machinery? Explain the basis for your answer (3 marks)
c. Which country – Australia or USA – has a comparative advantage in production of machinery and agriculture? Define comparative advantage and explain how it applies in this example. (3 marks)
ANSWER:
Question 3
(7 marks)
The Standard Model
The Standard Model of Trade is a general model that accommodates other models which reference specific sources of comparative advantage, e.g. Ricardian model (differences in labour effectiveness) and Heckscher–Ohlin model (references ‘factors of production’).
There are four key relationships upon which the Standard Model is based. Please list each of the four relationships and give one example for each.
ANSWER:
Question 4
(7marks)
Controversies in Trade Policy
After the Seattle 1999 World Trade Organization (WTO) Ministerial Conference, in the next two years, large anti-globalization demonstrations rocked the International Monetary Fund and World Bank in Washington.
Describe the role of WTO with respect to the following 7 aspects: knowledge of WTO/GATT, fostering trade liberalization, abolishing tariffs, increasing transparency, seeking resolutions, improving communication within trading blocs, controlling export subsidies, improving national welfare and competitiveness of developing countries (1 mark each)
ANSWER:
Question 5 (11 marks)
Instruments of Trade Policy
i. Evaluate the effects of an import tariff by the government of a small country. Explain in detail the effects of an import tariff on the economic welfare of the small country. (6 marks)
ii. Describe the potential advantages to the economy if the government offers an export subsidy (5 marks)
ANSWER:
Question 6
(11 marks)
Different market structures
Assume you are graduating from Holmes Institute and that you want to begin a business in Australia. You are aware that there are four different market structures and that some structures are hostile to new products and services. You decide upon Australia as a location for an Asian fast-food theme restaurant because you have expertise in that sector and you believe that it will be popular. You have also considered the four market structures: perfect, monopolistic, oligopoly and monopoly competition. You decide on one of the structures.
a. Describe each of the four market structures and explain how each one may be conducive to starting your new Asian themed small business. (8 marks)
b. Suppose you start your business within a monopolistic market structure. How is that structure advantageous to your proposed business and how would it affect the future growth of your business? (3 mark)
ANSWER:
END OF FINAL ASSESSMENT
Submission instructions:
• Save submission with your STUDENT ID NUMBER and UNIT CODE e.g. EMV54897 HI5016
• Submission must be in MICROSOFT WORD FORMAT ONLY
• Upload your submission to the appropriate link on Blackboard
• Only one submission is accepted. Please ensure your submission is the correct document.
• All submissions are automatically passed through SafeAssign to assess academic integrity.
—-
Student Number: (enter on the line below)
Student Name: (enter on the line below)
HI5016
INTERNATIONAL TRADE AND ENTERPRISE
FINAL ASSESSMENT
TRIMESTERT1, 2021
Assessment Weight: 50 total marks
Instructions:
• All questionsmust be answered by using the answer boxes provided in this paper.
• Completed answers must be submitted to Blackboard by the published due date and time.
Submission instructions are at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of knowledge of the key topics covered in this unit
Question 1
(7 marks)
The Gravity Model
1. “The gravity model of international trade is able to predict trade flows between two countries based on two principal factors.”
Describe the gravity model – specify the variables, use an example of Canada and the USA, or Mexico and the USA – both situations where the gravity model has been found to be accurate.
ANSWER: ** Answer box will enlarge as you type
Gravity Model clearly states that the volume of trade between two nations is directly proportional to their economic mass and a measure of their trade frictions.
The familiar explanatory variables are the distance between them and the GDP levels of patners (Grübler and Reiter, 2021, pg. 33). We also have others like, political, geographic and institutional factors
Due to it’s intuitive appeal, it has been the workhorse model more than 50years. Research shows that “overwhelming evidence that trade tends to fall with distance”.
Based on USA-CANADA, studies shows that the border has alot of dampening effect on volumes. Its effect is asymmetric and differs proportionately across provinces. Using heterogenous gravity model, the results are not different from researchers view.
The bias is larger when replacing standard gravity with heterogenous gravity model hence provincial differences altered significantly.
Question 2
(7 marks)
Absolute and Comparative Advantage
2. AssumeaworldoftwonationsUSAandAustralia.Thetwonationsproducemachineryandagriculture. The USA can produce 160 units of machinery or 200 unitsof agriculture while Australia can produce 140 units of machinery or 50 units ofagriculture, in the same time period.
a. Define “absolute advantage” (1 mark)
b. Which country, Australia or USA, has anabsoluteadvantagein the productionofagricultureandmachinery? Explain the basis foryouranswer (3 marks)
c. Which country – Australia or USA – hasa comparative advantage inproductionof machinery and agriculture? Define comparative advantage and explain how it applies in this example. (3 marks)
ANSWER:
(2) Absolute advantage refers to a situation where a trading country has uncontested superiority to producing a very particular good (Dean et al., 2020, pg.1).
(2B) USA has absolute advantage in both production of machinery and agriculture since her 160 units of machinery outweighs 140 units of Australia. Moreover, her 200 units of agriculture outweighs 50 units of Australia
(2c) Comparative advantage refers to the ability to to produce services and goods at a relatively lower opportunity cost not necessarily a greater quantity or quality. Above, Australia has comparatitive advantage in production of machinery since 140 units are better than 50 units of her agriculture while USA has a comparative advantage in production of agriculture since her 200 units are better off than 160 units of machinery.
Question 3
(7marks)
The Standard Model
The Standard Model of Trade is a general model that accommodates other models which reference specific sources of comparative advantage, e.g. Ricardian model (differences in labour effectiveness) and Heckscher–Ohlin model (references ‘factors of production’).
There are four key relationships upon which the Standard Model is based. Please list each of the four relationships and give one example for each.
ANSWER:
(3) Standandard model is based on:
The relationship between the production possibility frontier and the the relative supply curve. Suppose that each country produces food and cloth, the points on PPF at which an economy actually produces depends on the price ot relative cloth to food (Malakhov, 2021, pg.1). At a given market prices, a market economy will therefore choose production levels that will maximise the value of its oputput. Isovalue lines are used to indicate market value of output
(ii) Relative prices and demand
The value of an economy’s consumption equals its production. Therefore, production and consumption must lie on the same isovalue line. The choice of point on isovalue line depends on the taste of its consumers. The tastes of an individual can be represented by series of indifference curves. The set of combinations that leaves an individual equally well off.
(iii) The welfare effect of changes in the terms of trade
When possibility frontier increases, a nation that firsts export cloth is made better-off and when possibility frontier were to reduce, the country would be made worse off (Krafft, 2019, pg.1). If the country were first exporter of food instead of cloth the net effect would be reverse. An increase in possibility frontier would lead to a fall in possibility frontier and the country would be worse off. The rise in terms of trade thus increases welfare of a country and the decline in trade reduces its welfare.
(iv) The determination of world’s equilibrium by a world relative supply and world relative demand
Equilibruim relative price is met by the intersection of relative supply and demand curve. The unit price of a particular good is exchanged with relatibe price of another good.
Question 4
(7marks)
ControversiesinTradePolicy
After the Seattle 1999 World Trade Organization (WTO) Ministerial Conference, in the nexttwoyears,largeanti-globalizationdemonstrationsrockedtheInternationalMonetary FundandWorldBankinWashington.
Describethe role of WTO with respect to the following 7 aspects: knowledge of WTO/GATT, fostering trade liberalization, abolishing tariffs, increasing transparency, seeking resolutions, improving communication within trading blocs, controlling export subsidies, improving national welfare and competitiveness of developing countries (1 mark each) ANSWER:
(4i) The Knowledge of WTO
World Trade Organization operates on global trade rules that ensures stability and assurance. Producers and consumers know that they will enjoy great choice and secure supplies of finished products and services they embrace. Exporters and producers knows that open market will be readily open to them thus peaceful , accountable and prosperous economic world. Decisions taken by consensus and ratified by members’ parliament. Frictions channelled to WTO’S settlement process.
(4ii) Fostering trade liberation
WTO ensures free trade by lowering trade barriers such as custom duties. The WTO agreements stipulates for gradual trade liberalization to allow domestic adjustment to the changes hence providing predictability and stability in the world trade.
(4iii) Abolishing of tariffs
Normally there are no binding agreement that sets out the targets for tariffs reduction. Thus, individual members of the WTO enumerated their desired commitments to reduce and bind tariffs on goods schedules that are part of the famous Uruguay Round Agreement
(4iv) Increasing transparency
The WTO Glossary states that transparency is the degree to which practices, policies and process by which they are open, established and predictable. The Agreement improves transparency in trade measures by necessitating members to publish in their languages all modified or new laws, guidelines and regulations on any matter affecting trade and information made public.
(4v) Seeking resolutions
On disputes, resolutions are settled by dispute settlement process where the focus is basically on interpreting cottiments and agreements and how to ensure members’ trade policies conform with them. Hence, minimizing the dispute to military and political war
(4vi) Improving communication within trading bloc
The trade agreements signed really helps alot . Members of WTO know what the rules are, penalties accompanied by breaking rules hence easy flow of communication and trade
(4vii) Controlling of subsidies
They prohibit most subsidies directly linked to the volume of exports apart from for LDCs. Most incentives are given by the respective government of a nation to exporters to enable exports of goods.
(4viii) Improving nations welfare
Trade leads to greater productivity and relatively higher productivity leads to larger salaries hence improved economy and living standards of individuals in a nation.
Question 5 (11 marks)
Instruments of Trade Policy
i. Evaluatetheeffectsofan importtariff by the government of a small country. Explain in detail the effects of an import tariff on the economic welfare of the small country. (6 marks)
ii. Describe the potential advantages to the economy if the government offers an export subsidy (5 marks)
ANSWER:
On consumers they are worse-off since thehe increase in the domestic price of domestic substitutes and imported goods reduces consumer surplus in the market. Therefore, consumers are limited to goods produced locally and may find it expensive to acquire imported goods since they sepnd more as a result of the tarrifs (Nicolson, Fell and Heuber, 2018, pg. 280).
On Producers, they are normally better-off as a result of the tariff. The increase in the price of their relative products increases producer surplus in the market. The prices increase leads to an increase in total output of the existing firms , an increase in profit due to increase in employment (Welvaert, 2020, pg.1).
On Government, they receives tariff revenues to spend on other sectors of economy. Net Effect found by summing the gains and losses to consumers, producers and government. Thus, tariff causes a redistribution of income.
(5ii) Export subsidy raises producer surplus in the export market and lowers it in the import country market
It also reduces world production and consumption efficiency and hence resulting to world welfare to fall
In addition, it lowers consumer surplus and raises producer surplus in the exporter market
Futhermore, national welfare falls when a large country implements it
National welfare in the importing country rises when alarge exporting country implements it
Question 6
(11 marks)
Different market structures
Assume you are graduating from Holmes Institute and that you want to begin a business in Australia. You are aware that there are four different market structures and that some structures are hostile to new products and services. You decide upon Australia as a location for an Asian fast-food theme restaurant because you have expertise in that sector and you believe that it will be popular. You have also considered the four market structures: perfect, monopolistic, oligopoly and monopoly competition. You decide on one of the structures.
a. Describe each of the four market structures and explain how each one may be conducive to starting your new Asian themed small pmarks)
b. Suppose you start your business within a monopolistic market structure. How is that structure advantageous to your proposed business and how would it affect the future growth of your business? (3 mark)
ANSWER:
(a) Perfect competition; firms sell identical products to many buyers and there are no restrictions. Sellers and buyers are informed about the prices with established firms having no advantage over new ones (Bloch and Matcalfe, 2018, pg. 12). Thus, Asian themed small business will competitively thrive because there are no barriers to entry and the buyers will be informed about prices hence at liberty to take or move to other firm.
(b) Monopolistic nature normally there are large number of firms in the market, products are differentiated, multiple dimensions of competition and with few barriers to entry and exist. For, Asian themed small business it will work hard for it to enter the new market
(c) Oligopoly structure sees few interdependent firms with barriers to entry. Goods are highly differentiated. Non-price competition may be prevalent and branding for competitive advantage (Wilkerson, 2018, pg.1). Asian themed may start with branding to easily enter the market.
(d) Monopolistic competition is purely single seller in the market with no close substitutes. Barriers to entry hence a limiting factor for Asian themed business to thrive conducively
6(ii) Monopolistic competition sees few barriers to entry and exit. There are multiple dimensions of competition. Product differentiation and large numbers of firms in the industry. Therefore, it will be advantegous since products are differentiated and firms are many in the industry (Lahti, 2021, pg.74). Barriers to entry are few hence easy to start business and thrive competitively.
END OF FINAL ASSESSMENT
Submission instructions:
• Save submission with your STUDENT ID NUMBER and UNIT CODE e.g. EMV54897 HI5016
• Submission must be in MICROSOFT WORD FORMAT ONLY
• Upload your submissionto the appropriate link on Blackboard
• Only one submission is accepted. Please ensure your submissionis the correct document.
• All submissions are automatically passed through SafeAssign to assess academic integrity.
References
Bloch, H. and Metcalfe, S., 2018. Innovation, creative destruction, and price theory. Industrial and Corporate Change, 27(1), pp.1-13.
Dean, E., Elardo, J., Green, M., Wilson, B. and Berger, S., 2020. What Happens When a Country Has an Absolute Advantage in All Goods. Principles of Economics: Scarcity and Social Provisioning (2nd Ed.).
Grübler, J. and Reiter, O., 2021. Non-Tariff Trade Policy in the Context of Deep Trade Integration: An Ex-Post Gravity Model Application to the EU-South Korea Agreement. East Asian Economic Review, 25(1), pp.33-71.
Krafft, C. (2019). Trade: An Increasingly Connected World. Economics for the Greater Good.
Lahti, A., 2021. Economist (2108): Competition Theory—The Forgotten Theory of Incomplete Competition. Management, 9(2), pp.71-103.
Malakhov, S. (2021). Work of invisible hand: the gravitation between sellers and buyers on the consumption-leisure production possibility frontier.
Nicolson, M.L., Fell, M.J. and Huebner, G.M., 2018. Consumer demand for time of use electricity tariffs: A systematized review of the empirical evidence. Renewable and Sustainable Energy Reviews, 97, pp.276-289.
Welvaert, M., 2020. What might US Withdrawal from the World Trade Organization mean for New Zealand? Stress testing the New Zealand economy for extreme US tariff hikes.
Wilkerson, T., 2018. Advanced Economic Theory. Scientific e-Resources.
