04 Jun EXPLAIN THE DIFFERENCE BETWEEN INTER-INDUSTRY AND INTRA-INDUSTRY TRADE.
Explain the difference between inter-industry and intra-industry trade.
Question
Question One:
According to the text and theory inter-industry trade reflects comparative advantage while intra-industry trade reflects scale economies and demand for product variation
Explain the difference between inter-industry and intra-industry trade. (4 Marks)
Explain why countries that are similar in terms of technology and relative factor endowments are predicted to have a relatively large share of intra-industry trade. (5 Marks)
What are the different sources of gains from trade between countries that conduct both inter-industry and intra-industry trade? (5 Marks)
A country whose trade has almost no impact on world prices is at great risk of Immiserizing growth? Do you agree or disagree? Explain. (4 Marks)
Using appropriate diagrams, explain the effects of an increase in the amount of capital (assume it doubles) available in a “two product” economy, for the case of: I. A large trading nation 1) With capital as the abundant factor of production (6 Marks)
2) With capital as the scarce factor of production (6 Marks)
II. A small trading nation
1) With capital as the abundant factor of production (6 Marks) 2) With capital as the scarce factor of production (6 Marks)
Please stick to the following notations in answering this question: X : L intensive good
Y : K intensive good
Relative Price = PX/PY
Please draw separate diagram for each subpart.
Question Two:
Explain how two large countries that have been involved in a “tariff war” can reach a tariff distorted equilibrium in which there is still some trade between the two countries. From the tariff distorted equilibrium explain why there are no incentives for either country to unilaterally reduce its tariff and discuss whether or not there are potential benefits to be had from joint tariff reductions. Use offer curves to illustrate your analysis. (8 marks)
Consider the case of the Car industry in a small country (Nation 1). Suppose Nation 1 is the net importer of Cars. Draw a demand and supply diagram and
show the prices, quantity consumed, quantity produced, producer surplus and consumer surplus in the autarky situation and in the free trade situation. Now answer the following questions:
i.Suppose the government in Nation 1 is convinced by the car industry lobbyists and decides to impose an ad-valorem tariff of 100% on the imported cars. Under free trade, imported cars was 60 but the tariff reduced this to 30. Illustrate and explain the impact of this tariff on quantity consumed, quantity produced, producer surplus and consumer surplus on a suitable diagram. (11 Marks)
ii. Now suppose instead of imposing a tariff, government decided to use a quota that results in equivalent restriction effect to the tariff in (i): Government imposed a quota so as to reduce the number of cars to half of its free trade value (assume the quota limited imports to only 30 cars). Illustrate and explain the impact of this quota on quantity consumed, quantity produced, producer surplus and consumer surplus on a suitable diagram. Compare your results with the results obtained in part (a) above. (7 Marks)
iii.How will the results of part (a) and (b) change if there is an increase in the demand? (Hint: Demand curve shifts towards right). (5 Marks)
Question Three:
How are trade creation and trade diversion defined? What roles do they play in the gains and losses for trade blocs’ members and the world at large? Illustrate with the relevant diagrams. (10 Marks)
Why is export price instability judged to be a problem for developing economies? Why might it seem more likely to occur for developing economies than industrialized economies? (7 Marks)
Question Four:
a. “International migration of labour is beneficial to the workers in the source country who did not migrate”. Do you fully agree (or disagree) with this statement? Use a relevant diagram to argue your stand. (10 Marks)
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