ECS3702 EXAM PACK 2021

ECS3702 EXAM PACK 2021. International Trade. Question 1 An appreciation of the rand against the US dollar, will result in increased South African imports from the US, this is because fewer Rands can now purchase more US dollars, implying that South Africans now find it cheaper to buy US goods. Question 2 One of the possible effects of a recession in South Africa, on its trade with SADC member states is, widening of South Africa’s trade deficit, which implies that South Africa is exporting less and thus less employment opportunities, and dampened aggregate demand. Question 3 You are told that in 2016, South Africa’s exports to the rest of the world totaled 300 billion dollars, while its exports in the same year amounted to 650 dollars. From this statement, you deduce that, South Africa experienced a current account deficit in 2016. Question 4 Differences between countries in terms of opportunity costs results in countries acquiring, comparative advantage. A country with less opportunity cost does have a comparative advantage in the particular product over the other country. Question 5 The reason why relative costs differ between countries is because, countries have different relative factor endowments. Question 6 Should South Africa impose a tariff on imports from Japan, this will cause domestic production to rise, domestic consumption to rise and imports fall. The answers I guess they are wrong. Question 7 Which of the following statements is correct regarding the effect of imposition of an import tariff and a quota on domestic price and domestic production, an import tariff raises the domestic price of the good and the domestic production levels, and a quota raises the domestic price and domestic production. 2 | P a g e Prepared by Theron Group of Tutors Contact UK @ / for your revision class Question 8 The amount that consumers actually pay for 200 units of goods T is R1 200. Question 9 The total consumer surplus, in the absence of an import tariff and at Pt = R6, ½* base*height,1/2*200*4 = 400. Question 10 South Africa has emerged as a source of outward foreign direct investment on the Africa continent. One of the benefits to recipient African countries, of South Africa investment is increased employment in the African countries. Question 1 (b) 1.1 the European union is an example of a customs union, TRUEA customs union allows no tariffs or other barriers on trade among members (as in a free trade area), and in addition it harmonizes trade policies (such as the setting of common tariff rates) toward the rest of the world. The most famous example is the European Union (EU), or European Common Market, formed in 1957 by West Germany, France, Italy, Belgium, the Netherlands, and Luxembourg. 1.2 One of the ways a country can reduce its balance of payment deficit is to place restrictions such as tariffs and quotas on international trade, TRUE. 1.3 There are seven SADC member states, FALSE The 14-member Southern Africa Development Community (SADC), extending from Angola, Botswana, the Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe. 1.4 The implication of the factor price equalization theory is that free trade will cause equalization in prices of identical factors across countries, TRUE. International trade will bring about equalization in the relative and absolute returns to homogeneous factors across nations. As such, international trade is a substitute for the international mobility of factors. 1.5 If leather, used as an input in the production of leather boots is taxed, while imported leather boots are not taxed, this will cause the effective rate of protection to be negative (CHECK PRESCRIBED TEXT) Question 2 (a) Briefly define or explain H-O theory (5) According to the prescribed text, Heckscher–Ohlin theorem is a theory that suggests that a nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use 3 | P a g e Prepared by Theron Group of Tutors Contact UK @ / for your revision class of the nation’s relatively scarce and expensive factor. In short, the relatively labor-rich nation exports the relatively labor-intensive commodity and imports the relatively capital-intensive commodity. In terms of our previous discussion, this means that Nation 1 exports commodity X because commodity X is the L-intensive commodity and L is the relatively abundant and cheap factor in Nation 1. Conversely, Nation 2 exports commodity Y because commodity Y is the K-intensive commodity and K is the relatively abundant and cheap factor in Nation 2 (i.e., r/w is lower in Nation 2 than in Nation 1). (b) Community indifference curve (5) The curve called community indifference curve, shows different combinations of two commodities that yield equal satisfaction to the community or a nation. The community indifference curves do have the same characteristics as the indifference curves we studied in the previous modules, which states that higher community indifference curves, illustrate greater of higher satisfaction compared to the one below. One another characteristic as explained by the definition, the same points on the community indifference curve gives the same level of satisfaction. In addition, the indifference curves are convex to the origin, showing a negative slope. Lastly, we know that the indifference curves are many, and only a few are illustrated in an indifference map. Important to take note is that, indifference curves, in an indifference map do not cross. If it happens that they cross the first characteristic of saying a higher indifference curve gives a higher satisfaction as compared to the one below is violated. All these characteristics will be illustrated using the diagram below, where we say, point N and A, on the same indifference curve I, gives the same level of satisfaction, however, point T and H, gives a higher level of satisfaction, as well as point which gives a higher level of satisfaction compared to T and H, N and A. One last important characteristic of the community indifference curves is the marginal rate of substitution. The concept of marginal rate of substitution suggests that in its consumption patterns, a nation should sacrifice one unit of the other commodity to gain another unit of the second commodity and remain on the same indifference curve. Salvatore (2013) defined marginal rate of substitution as is the amount of Y that a nation could give up for one extra unit of X and remain on 4 | P a g e Prepared by Theron Group of Tutors Contact UK @ / for your revision class the same indifference curve. As shown in the diagram below, the marginal rate of substitution gives the absolute slope of the community indifference curve at the point of consumption and declines as the nation moves down the curve. According to Salvatore (2013), this decline in marginal rate of substitution shows that, the more X the country consumes and less of Y the nation consumes the more valuable commodity Y becomes as compared to X. 5 | P a g e Prepared by Theron Group of Tutors Contact UK @ / for your revision class (c) Scientific tariff (5) According to the prescribed textbook, scientific tariff is the tariff rate that would make the price of imports equal to domestic prices and (so the argument goes) allow domestic producers to meet foreign competition. However, this would eliminate international price differences and trade in all commodities subject to such “scientific” tariffs. (iv) Preferential trade agreements (5) Preferential trade agreements provide lower barriers on trade among participating nations than on trade with nonmember nations. This is the loosest form of economic integration. The best example of a preferential trade arrangement is the British Commonwealth Preference Scheme, established in 1932 by the United Kingdom with members and some former members of the British Empire. (v) Predatory dumping (5) The temporary sale of commodity at a lower price abroad in order to drive foreign producers out of business, after which prices are raised to take advantage of the newly acquired monopoly power abroad. Trade restrictions to counteract predatory dumping are justified and allowed to protect domestic industries from unfair competition from abroad. These restrictions usually take the form of antidumping duties to offset price differentials, or the threat to impose such duties. However, it is often difficult to determine the type of dumping, and domestic producers invariably demand protection against any form of dumping. Question 3 (a) Explain trade diversion and trade creation (5) Trade diversion occurs when lower-cost imports from non-members are replaced by higher cost imports from members. by itself, reduces welfare because it shifts production from more efficient producers outside the customs union to less efficient producers inside the union. Thus, trade diversion worsens the international allocation of resources and shifts production away from comparative advantage. It is important to remember that trade-diverting custom union results in both trade creation and trade diversion, and thus bring the possibility of the increase or decrease in the welfare of the union members. According to Salvatore (2013) while a trade-creating customs union leads only to trade creation and unequivocally increases the welfare of members and nonmembers, a trade-diverting 6 | P a g e Prepared by Theron Group of Tutors Contact UK @ / for your revision class customs union leads to both trade creation and trade diversion and can increase or reduce the welfare of members (and will reduce the welfare of the rest of the world).