Aspects of Economics of International Trade - Assignment Example

Economics of international trade Name: Institution: Course: Tutor: Date: Question one a) One country has an absolute gain over another country, if in producing a product it would use fewer resources in its production. Atlantis has an absolute gain in both computer and cloth production over Lemuria because it uses fewer labour hours in the production of the two products as compared to Lemuria that employs more labour hours to manufacture the similar produce. There would be no pattern of specialisation and trade between the two islands since Atlantis is efficient in producing both the computers and cloths, this therefore, means that Atlantis cannot specialise in any of the products. b) The production possibility frontier for Lemuria and Atlantis computers cloths 0 240 Atlantis 80 0 if they devote half of the hours in the production of the two items 40 120 d) A country has a comparative gain over another country if in producing the same product; it would use a lower opportunity cost or marginal cost in the production of the good. opportunity cost in production 1computer 1cloth computer cloth Atlantis 20 10 2 0.5 Lemuria 45 15 3 0.3 Atlantis has a comparative gain in producing computers over Lemuria because it has a lower marginal cost of 2, whereas Lemuria has a comparative gain over Atlantis in producing cloth since it has a lower opportunity cost of 0.3. Therefore, the pattern of specialisation would be; each island to specialise in the production of a good that it has a comparative gain over. Thus, Atlantis should specialise in the production of computers and Lemuria to specialise in the production of clothes. e) If both specialize in the good in which they have a comparative gain, they would produce; output in specialization computers clothes Atlantis 300 100 Lemuria 24 320 Total 324 420 Question two a) The supply and demand graph for Australia The supply and demand graph for New Zealand b) In the absence of trade, the equilibrium price and quantity for Australia and New Zealand would be; Price($) Quantity(calculators) Australia 15 600 New Zealand 30 600 Australia has a comparative gain in calculator production over New Zealand because is produces at the lowest marginal cost price of $15. c) Australia New Zealand World price supply demand supply demand supply demand 0 0 1200 0 1800 -1200 1800 5 200 1000 0 1600 -800 1600 10 400 800 0 1400 -400 1400 15 600 600 0 1200 0 1200 20 800 400 200 1000 400 800 25 1000 200 400 800 800 400 30 1200 0 600 600 1200 0 35 1400 0 800 400 1400 -400 40 1600 0 1000 200 1600 -800 45 1800 0 1200 0 1800 -1200 With trade the equilibrium calculators produced are 600, with an equilibrium price of $22.5. Therefore each country produces 600 calculators. d)When the cost of transporting each calculator from Australia to New Zealand is $5, it would imply that the prices of each calculator to rise so as to cater for the cost of transportation of the computers. Consequently, the demand for the calculators in New Zealand would decrease as the supply increases, due to high prices; meanwhile, there would be no impact on prices of calculators in Australia. The new equilibrium quantity and price in New Zealand would be as follows. The equilibrium quantity is 600 units of calculators and equilibrium price of $ 25 per calculator. The increase in the price of the computer is due to the transportation cost involved of each calculator from Australia to New Zealand. Since there is no transportation costs involved in Australia, there would be no increase in the prices of the calculators produced and supplied, and both the quantity supplied and demanded in the country will not be affected by the cost of transportation involved of each calculator to New Zealand. Australia would therefore produce at an equilibrium quantity and price of 600units and $ 15 respectively. e)In general, any cost involved in the trading process such as the transportation costs directly affects the prices of the goods and services involved. Therefore, increasing the prices of such goods, the demand for the goods decreases and their supply increasing, this affects specialisation since those countries that specialise get a negative impact on the prices. Question three a) To know which state is capital abundant and labour abundant, take the total supply of capital and labour in both states and compare the ratios. Thus, compare the following calculated ratios for each country: USA >) MEXICO →>; as shown from the calculation, USA has a higher ratio value than MEXICO. Hence, we conclude that USA is capital abundant and Mexico is laboured abundant. b) By taking the unit factor requirements to produce steel and bread, compare the ratios to find out whether production of bread or steel is capital intensive. Compute the ratios as follows; ) steel >bread →> From the above comparison, conclude that the production of steel is relatively capital intensive and the production of bread is relatively labour- intensive. c) Heckscher–Ohlin theorem states that a nation exports those products that use intensively the factors in which the country is relatively abundantly given. This thus implies that states which are loaded in labour would export labour -intensive products and states which are loaded in capital would export capital- intensive products. Therefore, according to the H-O theorem the USA would export steel and Mexico would export bread. This is so because the USA is more relatively capital endowed and would produce more steel as compared to Mexico; whereas Mexico is relatively labour endowed at would best produce bread as compared to USA. This then would be the pattern of trade between the two countries. Question four Nation 1 is a large trading nation while nation 2 is a small trading nation. In a world of two goods and two factors (capital and labour), Y becomes capital intensive given that (K/L) is larger than (K/L) of X. the production of Y needs 2k and 2 L giving K/L=1. X requires 1k and 4L resulting to K/L=1/4, hence making Y capital intensive and X labour intensive. Therefore, measuring capital and labour depends on their ratio K/L. By increasing capital a large nation 1would produce 1K using 2k-2L,and 2Y through using 4k-4L, where K/L=1. A small nation 2, that has K/L=4 for Y and 1 for X. This means that Y is capital intensive and X is labour intensive. Therefore, despite Y being capital intensive relative to X in both the two nations, nation 2 has a greater K/L ratio than nation 1. The increase of capital would make it cheaper for nation 1 and 2 to produce more goods at the same time minimizing their production costs. It further implies that if prices of capital falls, the production process would substitute capital for labour so as to minimize the costs of production, making the goods capital intensive in both nations. In terms of price factor, price of K (PK) and price of L (PL) in each country, nation 2 is thus capital abundant given that (PK/PL) in small nation 2 than in nation 1. The international trade profile of the United States. Rank: 1st in nominal terms. Currency traded US$ (USD) Fiscal year October 1 – September 30 Statistics The gross domestic product stands at $15.596 trillion as at June 2012, GDP growth 2.2% in June 2011 and June 2012, GDP per capita at $48,450 as at 2011, the gross domestic product per sector; agriculture 1.1%, manufacturing 22.3 %, services industry 76.7% in 2011, inflation 1.7% between June 2011 and June 2012, people below poverty 15% in 2010, the Gini -coefficient 0.46, Labour supply 155.0 million including 12.8 million of unemployed. Labour force by occupation The country’s sectors include; agriculture, tourism, and fishing: 0.7% manufacturing, mining, transport, and crafts: 20% administrative, professional, and industrial: 37% sales and organization: 24% other fields: Main exports and imports in share market The unemployment rate was 8.3% by July 2012, average gross salary stood at $48,450 per year. The state is highly diversified in industrial sector. It is a global leading, highly expertise leader, the second industrial output in the globe in petroleum products, steel products, motor vehicle produce, chemical products, telecommunications and electrical appliances, leading food processor. Its agricultural export is 9.1%, industrial products27%, capital products 48.0%, and consumer products at 15%. Main export partners Main exporting partners to USA include; Canada with 19%, China with 13%, Japan with 7%, Mexico with 5% and Ireland with 4%. The total imports registered $2.267 trillion in June 2012; the imports comprised agricultural products 5%, industrial products 33%, capital products 30%, and consumer products 32%. Main import partners The main importing partners to USA include Canada 14%, Japan 12%, China 14%, Mexico 6%, Ireland 5.1%and Germany 4%. There were no any trade barriers for the period as shown from the above profile. United States is highly capital- intensive than its trading partners, and according to Heckscher-Ohlin, a country that enjoys a comparative gain would supply those goods it is best in producing. The model addresses the issue of economic gain and composition of supply of goods and services. Therefore, the United States having capital intensive finds itself high suited to produce mix of goods as shown in above country profile. Countries such as Germany and Japan are classified as moderate in producing such products as the United States. Other trading partners as Canada and Asia are lowly endowed in capital and thus do not produce much in the international market. This gives United States a comparative position in both consumer and machinery production, although it imports some products from Germany and Japan. The model on the other side would suggest that even if United States enjoys an initial benefit from its resources, it would heavily be crowded over the time by Japan and Germany. While capital accumulation would lead to some other trading partners as moderate producers in the same line of products. In addition, the United States has human capital abundance and would export products that are intensive in human capital. The effects of the accumulation of capital gain by United States over other trading partners is enormous add to some e3xtent reduces the supply of goods by some of its partners in the international market. References Choi, E. K., & Harrigan, J. (2003). Handbook of international trade. Malden, MA: Blackwell Pub.. Henderson, D. R. (2008). The concise encyclopedia of economics. Indianapolis, Ind.: Liberty Fund. Jovanović, M.N. (2011). International handbook on the economics of integration. Cheltenham, UK Northampton, MA: Edward Elgar. Linnemann, H. (1966). An econometric study of international trade flows. Amsterdam: North-Holland Pub. Co. Klug, A., Young, W., Bordo, M. D., & Schiffman, D. (2006). Theories of international trade. London: Routledge. 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