1 Part (a)In this scenario, both Australia and Indonesia are each endowed with 100 hours of labour, and the production technologies for rice and ca

1 Part (a)In this scenario, both Australia and Indonesia are each endowed with 100 hours of labour, and the production technologies for rice and cars are different in each country. To determine which country has a comparative advantage, we compare opportunity costs. Comparative Advantage: Australia: Since 1 unit of rice is produced using 1 hour, which could have been used to produce 2 cars (given that 1 car is produced with 0.5 hours), the opportunity cost of 1 unit of rice is 2 cars. The formula for opportunity cost is: What is Given Up/What is Gained. The formula for the opportunity cost of one unit of rice when producing it in Australia is: 2 cars/1 rice. The opportunity cost of one unit of rice produced in Australia is 2 cars. The opportunity cost of one car produced in Australia is 0.5 units of rice. This is because 1 car equals 2 units of rice, so 1/2 an hour makes half a unit of rice. This can be written as: 0.5 rice/1 car. The formula for the opportunity cost of 1 car produced in Australia is 0.5 rice. The formula should be read as saying that the opportunity cost of producing one car in Australia is half a unit of rice. Now the formula for the opportunity cost of one car when producing it in Australia is: 0.5 rice/1 car. The opportunity cost of one car produced in Australia is 0.5 rice.Producing 1 car takes 0.5 hours; this would produce 0.5 units of rice The opportunity cost of 1 car is 0.5 units of riceIndonesia:Producing 1 unit of rice takes 1 hour; this could produce 0.5 cars (since 1 car takes 2 hours) The opportunity cost of 1 unit of rice is 0.5 carsProducing 1 car takes 2 hours; this would produce 2 units of rice The opportunity cost of 1 car is 2 units of riceConclusion:Australia has a comparative advantage in cars; that is, the opportunity cost represents a lower figure while Indonesia has a comparative advantage in rice.Trade Specialization and Exports:Australia Specializes in cars, exports them.Indonesia Specializes in rice, exports it. Free Trade Production Equilibria:Australia - Will allocate 100 hours to produce 200 cars.Indonesia - Will allocate 100 hours to produce 100 units of rice. Mutually Beneficial Price:The cost of 1 car must be between 0.5 and 2 units of rice, and the price of 1 unit of rice must be between 0.5 and 2 cars. If such terms of trade are observed, both countries will consume more of both goods than they would without trade.

Part (b)As asserted by the Ricardian model of comparative advantage, trade allows nations to specialize in producing commodities in which they have a comparative advantage, thereby leading to gains for all. In this case, Australia specializes in producing cars (comparative advantage) and Indonesia specializes in rice. Before trade: Australia consumes 40 units of rice and 120 cars. Indonesia consumes 50 units of rice and 25 cars.After specialization and trade, Australia puts all its labour into 200 cars, and Indonesia puts all its labour into 100 units of rice. If the terms of trade are 1 car for 1 unit of rice, then each country gains. For example, suppose that Australia trades 60 cars for 60 units of rice: Australia will now consume 60 units of rice and 140 of the cars. Indonesia will consume 40 of the units of rice and 60 cars.By trading, each country can have more of both goods than before trade. Australia moves from 40 units of rice and 120 cars to 60 units of rice and 140 cars. Indonesia moves from 50 units of rice and 25 cars to 40 units of rice and 60 cars. This shows that both countries are better off with trade and complete specialization under the Ricardian model.

2- Part (a): Why Free Trade is Not Beneficial to All Groups in Cambodia

In this case, Cambodia is Labor-abundant, and Australia is capital-abundant. Cambodia would specialize in producing labour-intensive goods such as shoes, while Australia would specialize in capital-intensive goods such as cars.

Relative Prices and Factor Rewards:

Pre-trade, the relative price level of labour-intensive products say shoes (Pshoes) is lower and capital-intensive products say cars (Pcars) are costlier: this indeed reflects the abundance of labour and scarcity of capital in Cambodia. Under free trade, Cambodia will export shoes and import cars; this will raise the relative price of shoes, hence, raising the wage rate of labour. However, it has a depressing effect on the return to capital, as the price of capital-intensive goods falls. This leads to income redistribution: labourers gain in the form of higher wage rate while owners of capital lose some income because of falling returns. Though trade increases the total level of wealth, not all particular groups are better offor, more explicitly, trade is not advantageous for everybody: notably, not for the capital owners.

Part (b): Trades Impact on Income Inequality in Cambodia

The Heckscher-Ohlin model predicts that trade will increase income inequality in labour-abundant countries like Cambodia. Before trade, if owners of capital in Cambodia were to earn much higher incomes than labourers because capital was scarce and hence more valuable so that abundant labour earned lower wages, this would contribute to income inequality. Goods that are capital-intensive, like cars, would be expensive in Cambodia while labour-abundant countries would be producing labour-intensive goods, such as shoes.Trade lets Cambodia specialize in labour-intensive goods (shoes) and import capital-intensive goods (cars). This raises the demand for labour and therefore its price wages of the workers. When the wagers increase, the workers are benefiting much in terms of income increase, thus reducing the income inequality with the owners of capital.Conversely, the demand for capital falls because Cambodia is importing capital-intensive goods rather than producing them domestically. The return to capital falls as the price of capital-intensive goods declines, lowering the income of capital owners and further reducing this gap between labour and capital incomes.Though trade increases the incomes of workers and the long-term trend is to reduce inequality, it does not wipe out inequality. Owners of capital, having higher initial wealth, may oppose this redistribution, creating social conflict. Workers in capital-intensive sectors also stand at the risk of losing their jobs or seeing no rise in wages. In summary, while trade does Cambodia's abundant factor (labour) well, it clearly creates winners and losers which exemplifies how intricate trades impact on income distribution can be.3- The Mechanisms of GATT for Multilateral Trade Liberalization

The GATT was to promote free trade among members by multilateral, reciprocal, and non-discriminatory lowering of tariffs and other trade barriers. Several mechanisms facilitated multilateral liberalization under GATT:1. Most Favoured Nation (MFN) Principle: Under the MFN Principle, members agreed not to discriminate between their various trading partners. Any treatment or concession of one member in the form of tariff reduction granted to another member had to be extended to each member, thereby ensuring benefits on a non-discriminatory basis.2. Reciprocity: Negotiations under GATT operated on reciprocity, meaning that tariff reductions extended by one member country elicited similar concessions from others, thus assuring fairness in the liberalization of trade.3. Tariff Bindings: In binding tariffs at certain levels, members agreed to provide this stability by ensuring that tariffs are not suddenly increased without compensation to the affected trader partners.

4. Non-tariff Barriers: GATT aimed to bring down quotas and import licenses among non-tariff barriers to lower these impediments for members; it went on to address trade-related issues like subsidies and intellectual property.

Challenges in Agricultural Trade LiberalizationAgricultural trade under the WTO has been difficult to liberalize, largely due to:

Agricultural Subsidies: The farmers in developed countries, namely the US and EU, are heavily subsidized, which distorts the global market and makes it tough for developing countries to compete.

Tariff Escalation: Increasing the tariff on processed agricultural products discourages value-added exports from developing countries.

Tariff Rate Quotas (TRQs): That is, imports are limited at low tariffs under TRQs, beyond which significantly higher tariffs are imposed, is one of the restrictions to market access for agricultural exporters.

Sanitary and Phytosanitary (SPS) Measures: SPS measures may be safety nets, but if they are over-applied, they can act as implicit barriers, notably affecting the agricultural exports from developing countries.4 a- Large relative decreases in the number of tourist arrivals to Australia will lead to a big fall in the demand for the Australian dollar in the foreign exchange market. As American tourists exchange US dollars for Australian dollars when they arrive in Australia, a sharp decrease in their number will lead to a significant reduction in demand for the Australian dollar. This is represented by a leftward shift in the demand curve for the Australian dollar.Conversely, fewer Australian tourists coming to the US means there will be a smaller decrease in the supply of AUD, as fewer Australians are seeking USD in exchange for their AUD. This results in a smaller leftward movement along the supply curve for AUD.As demand for AUD has fallen more relative to its supply, the equilibrium exchange rate for AUD will adjust. Now the AUD will be in excess supply with respect to the USD, leading to a fall in the value of AUD. In more precise terms, this means that the AUD will buy fewer USD than before, so it will fall from the previous equilibrium level of 0.7 USD per AUD. The greater decrease in the demand for AUD as opposed to its supply is hence the reason why the AUD depreciates.

b- Another circumstance under which the US would increase tariffs on imports from Australia is a US economic recession. This would imply a drop in U.S demand for Australian goods as it would directly reduce upon the demand for Australian exports in the US market. Impact on the Demand for AUD:If the US were to raise tariffs on imports from Australia, this would mean that Australian products are more expensive for American consumers, who respond by buying less from Australia. A fall in demand for exports means there is less need for US consumers to exchange USD for Australian dollars, so the demand for AUD in the foreign exchange market decreases; the demand curve for the AUD shifts to the left. Exchange Rate Impact:With lower demand for AUD, the market is now left with an excess supply of AUD. This leads to a depreciation of the AUD relative to USD. The exchange rate will fall from the current equilibrium of 0.7 USD per AUD; this means that one Australian dollar will buy less US dollars than before. The AUD depreciates, which in itself other things being equal makes Australian goods cheaper for other countries. This could somewhat offset the decline in exports to the US. Immediate first-order effect: AUD is on average weaker vs the USD.

c- Over the period from 2019 to 2020, the Australian dollar appreciated against the US dollar. The exchange rate rose from 0.69 USD to 0.83 USD per AUD. Such appreciation generally renders Australian exports more expensive for foreign buyers and hence reduces their competitiveness.At the same time, inflation in the US was 8%, while inflation in Australia was only 2%. This means US prices rose much faster than Australian prices. This is reflected, respectively, in their consumer price indices increasing to 108 in the US and 102 in Australia. The lower inflation in Australia means the prices of Australian goods increased at a slower pace. Compared to US goods, that is.An increase in the value of the AUD raises local prices for Australian exports. Yet higher US inflation somewhat blunts this effect by elevating the price of US goods compared with Australian goods. All up, the higher exchange rate under most conditions works to increase the costs of Australian exports and reduce price competitiveness. The appreciation of the AUD generally makes Australian goods more expensive abroad. The stronger is the purchasing power parity, the less competitive in price are Australian goods. This means that foreigners, especially those from the US, will have to pay more to get Australian products, excluding those experiencing rapid inflation at home. That would lower Australian export demands.

MAE213 International Trade

Trimester 2 2024

Final Assessment Task End of Unit Assessment

DUE DATE AND TIME: The start date and time will be as per the University Exam T2 2024 Exam timetable available via StudentConnect.

PERCENTAGE OF FINAL GRADE: 50%

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WORD COUNT: 2000 words

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This end of unit assessment task constitutes 50% of your assessment in this unit.

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Trimester 2 2024

Final Assessment Task End of Unit Assessment

Question 1. (This question has two parts: a and b)

Part (a)Assume that both Australia and Indonesia have the same labour supply of 100 hours. Table 1a below shows the technology in the production of rice and cars in the two countries as follows:

Table 1a: Unit Labour Requirements (hours)

Australia Indonesia

Rice 1 hour 1 hour

Cars 0.5 hour 2 hours

Assume also that before trade, Australias optimal consumption and production equilibria are the following: Australia: 40 units of rice and 120 cars Indonesia: 50 units of rice and 25 cars

If the two countries are allowed to trade with each other, which country has a comparative in the production of cars and rice? Which country will export cars? Which country will export rice? What are the production equilibria in free trade in both countries? What are the conditions for mutually beneficial price in free trade? Be elaborate in your answer.

[4 marks]

Part (b)Show that if both countries trade according to Ricardian model, both will be better off. In other words, show that there exists a scenario in which both countries trade according to the Ricardian model of comparative advantages, and they both can consume more of rice and cars than before trade (as showed in Table 1a above). Also show that in the Ricardian model in free trade, there must be complete specialisation by both countries.

[6 marks]

Question 2. (This question has two parts: a and b)

Australia and Cambodia both have similar demand functions and similar taste preferences. Australia however is capital abundant while Cambodia is labour abundant. Assume that in autarky, the two countries produce two goods: capital-intensive cars and labour-intensive shoes.

Part (a)

In Diagram (a) below, r/w denotes relative cost of capital (i.e., the capital rental-wage ratio) while Pcars/Pshoes denotes the relative price of cars (i.e. the price of cars relative to the price of shoes). Using Diagram (a), show why free trade is NOT beneficial to all groups within Cambodia. Be elaborate in your answer.

Diagram (a)

78867046355 (r/w)

627380134620

Pcars/Pshoes = Pc/Ps

[5 marks]

Part (b)Also discuss what the Heckscher-Ohlin model will predict about the effect of trade on income inequality in Cambodia. Note that before trade the income of the owners of capital in Cambodia is much higher than the income of the owners of labour in Cambodia. [5 marks]

Question 3. (This question has only one part)

The General Agreement on Tariffs and Trade (GATT) was created in 1947 with the aim of reducing tariffs and other trade barriers on a reciprocal, mutually advantageous and multilateral basis. Discuss in detail what mechanism GATT members rely on to achieve this goal of multilateral liberalization of trade among them. Also discuss the problems that WTO members today are faced with to liberalize trade in agriculture. [15 marks]

Question 4. (This question has three parts a, b, and c)

Part (a)

The current Australian foreign exchange at equilibrium is 0.7 US dollar ($US) per Australian dollar. What will happen to the Australian foreign exchange in the following different scenario?

The reduction in number of Australian tourists travelling to the US is much less than the reduction in the number of American tourists travelling to Australia. Elaborate your answer using the concepts of the demand curve and the supply curve for the Australian dollar.

[5 marks]

Part (b)

The current Australian foreign exchange at equilibrium is 0.7 US dollar ($US) per Australian dollar. What will happen to the Australian foreign exchange in the following different scenario?

Due to US economic recession, the US decides to increase its tariffs on the US imports from Australia.

[5 marks]

Part (c)The nominal exchange rates between the Australian dollar and the US dollar in 2019 and 2020 are as follows: 0.69 USD and 0.83 USD for 1 AUD, respectively. For the same period, the United States and Australia experience an inflation rate of 8% and 2% respectively. In other words, in 2020, the US and Australian consumer price indices (CPI) increase to a level of 108 and 102, respectively. What happens to the competitiveness of the Australian exports? Discuss and explain your answer. [5 marks]

- END OF ASSESSMENT -