INTERNATIONAL TRADE
ECS3702 INTERNATIONAL
TRADE
0834259100/061 363 2841
, MAY JUNE 2016
QUESTION 1 (a)
Define the following concepts
The marginal rate of substitution
refers to the amount of Y that a nation could give up for one extra unit of X and remain
on the same indifference curve.
Factor Intensity reversals
Over a period, a commodity that was initially labour-intensive may become
increasingly capital-intensive, resulting in both countries wishing to specialise in the
production of such.
Trade creation
the decrease in domestic output because of replacement by imports;
NAFTA
North American Free Trade Area and it’s a main form of integration
Mercantilism - the belief that trade was a zero-sum game that is a situation or
interaction in which one participant's gains result only from another's equivalent losses
Multinational Corporations - An enterprise operating in several countries but
managed from one (home) country. Generally, any company or group that derives a
quarter of its revenue from operations outside of its home country
ANSWER ALL QUESTIONS ON THE TRUE/FALSE
1. According to the theory of comparative advantage, trade will not occur if one country
is less efficient in the production of all products F
2. According to Ricardian theory, comparative advantage depends on relative
differences in labour productivity T
1|Page
, 3. The slope of a country's PPF reflects the opportunity cost of product C In terms of
product T
4. The Heckscher-Ohlln theory asserts that relative differences in labour productivity
underlie comparative advantage F
5. According to the factor-endowment theory, International specialization and trade
cause a nation's cheap resource to become cheaper and a nation’s expensive
resource to become more expensive F
6. Intra-industry trade would occur 'f computers manufactured In the United States by
IBM are exported to Japan while the United States Imports computers manufactured
by Hitachi of Japan T
7. According to the product-life-cycle theory, the first stage of a product's trade cycle is
when it is introduced to the home market T
8. According to the product Life cycle model, comparative advantage shifts from cheap-
labour countries to high-technology countries after a manufactured good becomes
standardized F
9. A tariff always lowers the well-being of each nation, Including the nation imposing the
tariff F
10. 1f the government pays a $1 subsidy to the farmers on every pound of apples sold,
the farmers receive a dollar more per pound of apple than they would have without the
subsidy F
11. Suppose South Africa produces more toothbrushes per hour and fewer envelopes per
hour than Indonesia These countries only produce these two goods Thus, South Africa
Will have a comparative advantage in producing toothbrushes T
12. A production subsidy can be used more efficiently in place of a tariff to Increase
Production in an Industry of a small open economy T
13. The most generic form of price discrimination in international trade is dumping T
2|Page
, QUESTION 2
a) Globalization has meant that countries are increasingly dependent
on each other The USA is one of South Africa's largest trading
partners Explain how the South African economy will be affected by
a stimulation of the American economy
Globalisation refers to the integration of markets in the global economy,
leading to the increased interconnectedness of national economies
Globalisation has led to a situation where international trade and direct
foreign investment are expanding faster than global output. Stimulation of
USA economy might imply access to larger markets means that firms may
experience higher demand for their products, as well as benefit
from economies of scale, which leads to a reduction in average production
costs.
Stimulation of USA economy can lead to increased flows of investment
between countries, which has created benefits for SA. These benefits
include the sharing of knowledge and technology between countries In the
long term, increased trade is likely to lead to the creation of more
employment in both countries.
Can also have disadvantages such as
Large multinational companies can also suffer from diseconomies, such as
difficulties associated with coordinating the activities of subsidiaries based in
several countries.
Critics of globalisation also highlight the potential loss of jobs in SA markets
caused by increased, and in some cases, unfair, free trade. This view
certainly accounts for the some of the rise in nationalist movements in many
developed economies, along with the push for increased protectionism
3|Page
ECS3702 INTERNATIONAL
TRADE
0834259100/061 363 2841
, MAY JUNE 2016
QUESTION 1 (a)
Define the following concepts
The marginal rate of substitution
refers to the amount of Y that a nation could give up for one extra unit of X and remain
on the same indifference curve.
Factor Intensity reversals
Over a period, a commodity that was initially labour-intensive may become
increasingly capital-intensive, resulting in both countries wishing to specialise in the
production of such.
Trade creation
the decrease in domestic output because of replacement by imports;
NAFTA
North American Free Trade Area and it’s a main form of integration
Mercantilism - the belief that trade was a zero-sum game that is a situation or
interaction in which one participant's gains result only from another's equivalent losses
Multinational Corporations - An enterprise operating in several countries but
managed from one (home) country. Generally, any company or group that derives a
quarter of its revenue from operations outside of its home country
ANSWER ALL QUESTIONS ON THE TRUE/FALSE
1. According to the theory of comparative advantage, trade will not occur if one country
is less efficient in the production of all products F
2. According to Ricardian theory, comparative advantage depends on relative
differences in labour productivity T
1|Page
, 3. The slope of a country's PPF reflects the opportunity cost of product C In terms of
product T
4. The Heckscher-Ohlln theory asserts that relative differences in labour productivity
underlie comparative advantage F
5. According to the factor-endowment theory, International specialization and trade
cause a nation's cheap resource to become cheaper and a nation’s expensive
resource to become more expensive F
6. Intra-industry trade would occur 'f computers manufactured In the United States by
IBM are exported to Japan while the United States Imports computers manufactured
by Hitachi of Japan T
7. According to the product-life-cycle theory, the first stage of a product's trade cycle is
when it is introduced to the home market T
8. According to the product Life cycle model, comparative advantage shifts from cheap-
labour countries to high-technology countries after a manufactured good becomes
standardized F
9. A tariff always lowers the well-being of each nation, Including the nation imposing the
tariff F
10. 1f the government pays a $1 subsidy to the farmers on every pound of apples sold,
the farmers receive a dollar more per pound of apple than they would have without the
subsidy F
11. Suppose South Africa produces more toothbrushes per hour and fewer envelopes per
hour than Indonesia These countries only produce these two goods Thus, South Africa
Will have a comparative advantage in producing toothbrushes T
12. A production subsidy can be used more efficiently in place of a tariff to Increase
Production in an Industry of a small open economy T
13. The most generic form of price discrimination in international trade is dumping T
2|Page
, QUESTION 2
a) Globalization has meant that countries are increasingly dependent
on each other The USA is one of South Africa's largest trading
partners Explain how the South African economy will be affected by
a stimulation of the American economy
Globalisation refers to the integration of markets in the global economy,
leading to the increased interconnectedness of national economies
Globalisation has led to a situation where international trade and direct
foreign investment are expanding faster than global output. Stimulation of
USA economy might imply access to larger markets means that firms may
experience higher demand for their products, as well as benefit
from economies of scale, which leads to a reduction in average production
costs.
Stimulation of USA economy can lead to increased flows of investment
between countries, which has created benefits for SA. These benefits
include the sharing of knowledge and technology between countries In the
long term, increased trade is likely to lead to the creation of more
employment in both countries.
Can also have disadvantages such as
Large multinational companies can also suffer from diseconomies, such as
difficulties associated with coordinating the activities of subsidiaries based in
several countries.
Critics of globalisation also highlight the potential loss of jobs in SA markets
caused by increased, and in some cases, unfair, free trade. This view
certainly accounts for the some of the rise in nationalist movements in many
developed economies, along with the push for increased protectionism
3|Page
