International trade

Ozland has closed itself off to international trade

SECTION A
Answer each question and explain as per the instructions at the bottom of each question.

QUESTION A.1

Ozland has closed itself off to international trade. Ozland citizens noticed that the policy shift resulted in no change in the prices of computers, why may that be?

A. Autarky prices and free trade prices are the same.

B. Autarky prices are larger than free trade prices.

C. Autarky prices are smaller than free trade prices.

D. The absolute value of autarky prices are negatively correlated with free trade prices.

(1 mark)

Explain your answer in up to 200 words and using a diagram

(4 marks)

QUESTION A.2

When Ozland closes off to trade, it notices that the number of firms in an industry doubles in size. What economic theory would help us explain this phenomenon?

A. Stolper-Samuelson.

B. Melitz.

C. Ricardian.

D. Cournot.

(1 mark)

Explain your answer in up to 200 words and using a diagram

(4 marks)

QUESTION A.3

In the Pure Specific Factors model with two sectors, Cars (C) and Wheat (W), Capital (K) is specific to C and Land (A) is specific to W. If the government imposes a tariff on the imports of W then

A. Both owners of K and owners of A will benefit.

B. Owners of A will benefit.

C. Owners of K will benefit.

D. Neither owners of K nor owners of A will benefit.

(1 mark)

Explain your answer in up to 200 words and using a diagram

(4 marks)

QUESTION A.4

In a Mixed Specific Factors model with two sectors, Cars (C) and Wheat (W), Capital (K) is specific to C and Land (A) is specific to W. If the government imposes a tariff on the imports of W then

A. Both owners of K and owners of A will benefit.

B. Owners of A will benefit.

C. Owners of K will benefit.

D. Neither owners of K nor owners of A will benefit.

(1 mark)

Explain your answer in up to 200 words and using a diagram

(4 marks)

QUESTION A.5

A country imposing a tariff can benefit in terms of social welfare if

A. The terms-of-trade benefit exceeds the sum of production and consumption distortion loss.

B. The tariff revenue exceeds the sum of production and consumption distortion loss.

C. The consumer surplus loss is less than the producer surplus gain.

D. The terms-of-trade benefit exceeds the consumer surplus loss.

(1 mark)

Explain your answer in up to 200 words and using a diagram

(4 marks)

SECTION B
Short answer questions. Answer each in up to 200 words.

Background
Imagine that you work for the World Bank and you have been called to Ghana to aid the new president to come up with a new international trade strategy.

You are told that the new government is interested in moving away from agriculture and into manufacturing. To do so, the government wants to pursuit a policy of import substitution industrialization (ISI).

You are given a brief about Ghana highlighting the following points:

About half of Ghana’s population depends on agriculture, but Ghana still imports some of its food.
The majority of Ghana’s people live in rural areas and exist on a subsistence way of life.
Ghana has one of the highest rates of income inequality in the world.
Nearly half of the population is employed in agriculture.

QUESTION B.1

Ghana imports and exports food from and to neighbouring Côte d’Ivoire. The latter nation is very similar to Ghana in most ways. Can you explain what may drive two very similar nations to trade?

(5 marks)

QUESTION B.2

Ghana’s parliament is debating how to undertake ISI. The debate centres on whether they should impose tariffs on imports or use quotas. Which system is better for consumers? (use a diagram to explain yourself).

(5 marks)

QUESTION B.3

Ghana’s president is also very interested in banning the imports of food in order to increase nutrition in her country. What is the logic behind this? Will it work?

(5 marks)

QUESTION B.4

A representative from Ghana’s agricultural organisation is very much in favour of closing borders. He argues that consumers and producers will benefit from this. Is he right? Who would benefit most, are there any losers from the policy?

(5 marks)

QUESTION B.5

After a meeting with Ghana’s president you learn that the government is also interested in repatriating migrants that went to European countries to study engineering a decade ago. Explain how this is likely to change Ghana’s comparative advantage.

(5 marks)

Sample Solution

ACED ESSAYS