ECS3702 Assignment 2 (DETAILED ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEE

ECS3702 Assignment 2 (DETAILED ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references ... Question 1A Use the hypothetical information in the table below to answer the questions that follow: Output/hr Unos Tres Cellphones (ton/hr) 18 6 Candles (ton/hr) 6 8 (i) Identify the product of absolute advantage and disadvantage for both Unos and Tres. Explain your answer. [4 marks] (ii) From your answer in (i) above, explain whether trade is possible and explain the pattern of trade according to the theory of absolute advantage. [4 marks] 2 (iii) Determine the commodity of each nation’s comparative advantage and disadvantage. No marks will be awarded if you do not show your workings. [6 marks] 3 (iv) From your answer in (iii) above, explain whether trade is possible and the pattern of trade according to the theory of comparative advantage. [6 marks] [20] QUESTION 2 [25 marks] Assume that Unos is a capital-abundant country and Tres is a labour-abundant country. Assume they produce two goods, candles which are labor intensive in their production and cellphones which are capital-intensive in their production. Answer the following questions. (i) In which country will the relative price of cellphones be lower? Explain. [2 marks] (ii) Explain briefly what happens in both countries to (a) the production of candles and cellphones 4 (b) the demand for labour and capital (c) the wage and interest rate and (d) the pre-trade differences in wages and interest rates as trade occurs. [8 marks] (iii) Unos is a capital abundant nation, and Tres is a labour abundant nation, producing and consuming candles and cellphones, using both labour and capital. Candles are 5 labour intensive, and cellphones are capital intensive in their production. Explain, using diagrams, the basis of and gains from trade for both countries given their differing resource endowments. [15 marks] 6 7 [25] QUESTION 3 [25 marks] QUESTION 3A [20 marks] Explain briefly, but succinctly, how (i) the number of members countries, (ii) the proximity of member countries, (iii) the level of pre-union trade, (iv) the level of competition of the member state economies, and (v) the level of a custom union’s trade barriers with the rest of the world affects the level of welfare provided through the formation of the customs union. [20 marks] 8 9 QUESTION 3B [5 marks] Assume the following: (i) Two countries, Unos and Tres (ii) Unos is a capital abundant nation. (iii) Tres is a labour abundant country. (iv) Unos is a developed country and Tres is a developing country. Explain briefly, but comprehensively, why labour unions in a developed country such as Unos would favour trade restrictions over labour unions in a developing country such as Tres. [25] QUESTION 4 [30 marks] Use the information provided below to answer the questions that follow. Scenario A (i) The autarky price of pillows is R60 (ii) At autarky, domestic production and consumption is 50 tons of pillows 10 (iii) The free trade price of pillows is R20 (iv) Domestic production and consumption is 30 tons and 100 tons of Pillows respectively, at the free trade price (v) The South African government imposes a R10 specific tariff on the imports of pillows, resulting in a decline in consumption of 20 tons and an increase in production of 10 tons. (a) Represent the above graphically (note: the demand curve touches the price line at R80) [5 marks] 11 (b) Compute the consumer surplus before and after the tariff. [5 marks] (c) Compute the producer surplus [3 marks] 12 Scenario B (i) The autarky price of pillows is R10. Domestic production and consumption is 60 tons of pillows (ii) The free trade price of pillows is R20 (iii) Domestic production and consumption are 80 tons and 50 tons of pillows respectively, at the free trade price. Pillow exports are 30 tons. (iv) The South African government imposes a R10 subsidy on each ton of pillows exported, resulting in increased production of 20 tons and decreased consumption of 10 tons. (a) Represent the above graphically (Note: the demand curve touches the price line at R80) [5 marks] 13 (b) Compute the value of the loss in domestic consumption and the gain in domestic production. [5 marks] 14 15 (c) Compare the impact of the R10 specific tariff and the R10 subsidy on consumers and producers (discuss the impact in terms of the values you computed in scenario A and B). [4 marks] (d) Based on your answer in c above, would you support the trade policy of a tariff or a subsidy? Why?