International Trade Compulsory Assignment
PART A – DISCUSSTION/EXPLANATION QUESTIONS
Question 1 (10 marks)
Explain alternative theories of international trade from the 16th to the 20th century.
Clearly state the shortcoming of each earlier theory which in turn was the basis for the
development of a later theory.
Question 2 (10 marks)
Read the article “Economists find evidence for famous hypothesis of comparative
advantage” (attached) and answer the following questions:
a) Why is comparative advantage hardest to measure if the theory is correct? How does
this article get around this problem?
b) The authors calculate a correlation that would be one (1) if the theory worked perfectly.
What do they find, and why is it considered as providing support for the theory?
Question 3 (10 marks)
Use the attached article “Guest post: China and Russia – allies not frenemies in central
Asia” to answer the questions below:
a) What are the sources of low competitiveness of Central Asian states?
b) In what context is Mercantilism alive again?
Question 4 (10 marks)
What are the outstanding features of the ‘new trade theory’ which is based on economies of
scale and product differentiation, compared to the classical trade theory?
Question 5 (10 marks)
Use the article titled “The Catch-22 of U.S. Trade” to answer the following questions
a) What was the average US tariff in 1999 and what were the average tariffs faced by
Nepal’s and Bangladesh’s exports? Why did the US impose tariffs on these two countries?
b) Who gains and loses from US textile and apparel tariffs, and from their removal?
PART B – PROBLEM-SOLVING QUESTIONS
Question 6 (15 marks)
Assume that both Australia and Germany produce beef and cars. Within an hour of work,
Australia can produce either 18 kilos of beef OR 6 cars, while Germany can produce 24 kilos
of beef OR 24 cars.
a) What is the opportunity cost of beef (B) and cars (C) in each country? b) In which
commodity does Australia have a comparative cost advantage? What about Germany?
b) Assume constant opportunity cost and no trade (i.e., autarky), plot the production
possibilities frontier (PPF) for each country on two separate diagram.
c) What is the range for mutually beneficial trade between Australia and Germany for each
car traded in terms of beef?
d) Assume the terms of trade is that 1 car is exchanged for 2 kilos of beef. With the aid of
diagrams, explain the gains from trade for both countries.
Question 7 (20 marks)
Assume there are two nations (i.e., Nation 1 and Nation 2) which have the same technology
but different factor endowments and tastes. Each nation produces two commodities (X and
Y) under increasing costs conditions. Also assume no transportation costs, and no trade
obstructions. Prove geometrically that mutually advantageous trade between the two nations
is possible. Explain your diagrams. (Note: Your answer should show the autarky (no-trade)
and free-trade points of production and consumption for each nation, the gains from trade of
each nation, and express the equilibrium condition that should prevail when trade stops
Question 8 (15 marks)
The following graph shows the domestic demand and supply curves of steel in Australia.
a) What would be the price of steel in Australia if a policy of “self-sufficiency” were
established and no imports were allowed? How many tons of steel would be produced?
b) Assume the world price of steel was $100 per ton and Australia adopted a free-trade
policy. Identify on the graph and state how much steel would be produced in Australia,
and how much would be imported.
c) Now suppose the Australian government levies a tariff of 25% on steel imported.
Show on the graph and determine the effects of the tariff on domestic production, imports,
consumer surplus, and producer surplus.
d) Briefly explain whether Australia as a nation would gain or lose in net terms from this
tariff, and indicate the magnitude of this net gain or loss.
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