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Students Zone - Answers to End of Chapter Questions
CHAPTER 2 INTERNATIONAL TRADE
1. In the past, companies within differing countries have been seen to have an absolute advantage ‘in everything’. In the early 19 th century this applied to the United Kingdom, then it shifted to the United States, Japan in the 1960s/1970s and now China. What gives them the advantage, and what problems does it bring with it? Use the example of China now, to illustrate your answer.
Answer
CA comes from cost differences – which come from such things as wage rates, productivity, technology etc.
2. If the production capacity of the Netherlands and Belgium in two goods, cheese and chocolates, is as follows, per unit of labour per day:
Chocolates |
Chees |
|
Boxes |
Rounds |
|
Netherlands |
20 |
50 |
Belgium |
100 |
80 |
Answer
Belgium is 5x (100/20) better at producing chocolates and 1.6x (80/50) better at producing cheese – therefore has greater advantage (comparative advantage) in chocolates and should produce them and trade for cheese.
Netherlands should produce cheese as it has the least disadvantage in this (therefore a CA) and trade for chocolates.
2a). Which country has a comparative advantage in which product? Explain your conclusion.
Answer
Belgium would want the exchange rate as near to the Netherlands opportunity cost as possible – as near to 1B = 2.5 R as possible
2c). What rate of exchange would Belgium prefer and why?
Answer
Netherlands would like to be as near to Belgium’s opportunity cost as possible – 1B = 0.8R
2d). What rate of exchange would the Netherlands prefer and why?
Answer
It will finish somewhere between the two and depends on relative power
2e). Prove both will gain if they follow the principle of comparative advantage. Use the example of Belgium selling 30 boxes of chocolates and a rate of exchange (or terms of trade) of 1 box of chocolates = 1.5 cheeses.
Answer
If 1B = 1.5R.
Belgium sells 30 boxes of chocolates and gets 45 cheeses (30 x 1.5).
If it had sold 30 chocolates at home it would have got 24 cheeses (1B = 0.8R) – so has gained 21 cheeses through trade.
Netherlands paid 45 cheeses for 30 chocolates
For 45 cheeses at home it would only have got 18 boxes of chocolates – therefore has gained 12.
Both have gained. How much they gain, depends a lot on the exchange rate.
3. The Netherlands exports Heineken beer and imports Löwenbräu. What sort of trade is this an example of?
Answer
It is an example of intra industry trade – the same sort of product but slightly differentiated (e.g. with brand name).
- In the chapter we showed that one of the major influences on world trade is and has been, the growth of regional trade agreements (see also Chapter 4). Imagine you are the manager of an EU electronics company attempting to sell your product to a customer in the NAFTA trading block, what problems do you think you might encounter.
Answer
Problems an EU electronics company could experience selling to NAFTA
a) tariffs/quotas
b) differing technical requirements
c) differing health and safety requirements
d) bureaucracy
e) if try to assemble product in the NAFTA area, could meet rules of origin requirements
4. In the chapter, the example given of Vernon’s product lifecycle is the market in colour televisions. Can you think of another product where you could trace the trading lifecycle in this way?
Answer
Most products have a lifecycle but it just has differing timelines. Take an example like MP3 players – short introductory phase, steep growth phase (which we are just coming to the end of) and we don’t know the length of the maturity phase, but could be short and steep drop if there is a change in technology. Could compare it to the lifecycle of the portable CD player.
5. In the chapter we looked at fair trade and the case study examined the case of coffee. However there have been other examples like this in the press in recent years, sugar and cotton being just two. (i) How could fair trade help the LDC producers and DC consumers in these two areas? (ii) Can you think of any other areas where fair trade is ‘long overdue’?
Answer
(i) Things that affect the growth of trade (many factors – here are a few):
- Transport costs – e.g. massive increase in price of oil could raise costs and take away CA
- Recession in the world or major areas of the world economy – eg US, EU, Asia. This reduces demand for trade
- Trade protection e.g. if the WTO loses credibility and countries start building protectionist measures against each other e.g. 1930s
- Financial crisis in major economies (e.g. US 1930s) – reduces confidence and demand and increases protectionist measures
- Sugar (see chapter 3 for case study) and cotton (see chapter 3 website case study) – shows how highly subsidized this area is and how this affects the world trade. Also both products are dominated by large MNCs companies and agricultural business. To remove protection would reduce world price and DCs consumers would gain. LDC producers would have a chance at competing in a more fair market
Other products where fair trade is overdue – most agricultural products. Christian Aid does a video outlining the case for nuts – see their website.
Other End of Chapter Questions >>
- Chapter 1
- Chapter 3
- Chapter 4
- Chapter 5
- Chapter 6
- Chapter 7
- Chapter 8
- Chapter 9
- Chapter 10
- Chapter 11
- Chapter 12
