DEAKIN UNIVERSITY, FACULTY OF BUSINESS AND LAW

DEAKIN UNIVERSITY, FACULTY OF BUSINESS AND LAW

Department of Economics

END OF UNIT ASSESSMENT (EoUA)

TRIMESTER 1, 2023

Unit Code: MPE 711

Unit Name: Global Trade and Markets

Estimating Working Time: 2 hours

Estimated time for preparing and submitting your final responses to CloudDeakin Dropbox: 45 minutesThis is an Open Book Take Home Written Task. You must upload your final responses as a Microsoft Word Doc and a pdf file to the CloudDeakin End of Unit Assessment Dropbox within 24 hours of the start time scheduled in the EoUA timetable.

This exam consists of 5 questions. Answer all the questions. This exam paper carries a total of 45 marks. (This is converted to 45% of your total assessment in this unit).

Preparing and submitting your answers:

Download the assessment answer sheet word document and save it on your computer using the file name: your-student-ID, unit-code; A hypothetical example: 123456789_MPE711.

Input your answers in that document by typing your response below each question number.

Save your work regularly as you make progress towards completing this assessment task.

Insert appropriate diagrams and calculations, if necessary, in the answer document. You may legibly draw/hand-write relevant graphs or calculations on a piece of white paper, scan it and insert it in the document along with your typed response to each question. You may use a calculator to aid your work.

For instructions on scanning and inserting images in the word document, please refer to End of Unit Assessment Preliminary Information Document that was released on the unit site prior to the EoUA period.

Upload the completed answer sheet word document along with a pdf copy of the same in the CloudDeakin Dropbox prior to cut-off time. Check that you uploaded the correct file.

Late submissions will not be marked.

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In the unlikely event that you cannot upload your completed answers, email it as an attachment to your unit chair [cpham@deakin.edu.au] within the submission time.

it is important that you work individually on this assessment task. Your submission will be reviewed for the purposes of detecting contract cheating, collusion and/or plagiarism.

Answer all the questions belowQuestion 1. (This question has two parts a, b and c)

Assume that Australia and Indonesia have the same labor supply and their Production Possibility Frontiers/Schedules are presented below.

Figure 1.a below shows the Production Possibility Schedules of country A

and country B.

Figure 1.a

Sugar (tons)

1435735825500

14703001757920092646510160 100

00 100

10171503810 60

00 60

143734812780700

25349206350Australia

00Australia

106362578740Indonesia

00Indonesia

567578517471Autos

020000Autos

111555810395200

366094631750 120

00 120

196024550182 50

00 50

Part (a)

Given the PPFs/PPSs of Australia and Indonesia in Figure 1.a, please identify the opportunity costs in the production of sugar (S) and cars (C) in Australia and Indonesia. According to Adam Smith what would be the patterns of trade between Australia and Indonesia? Please be elaborate in your answer. Please show the condition for the price of rice in terms of cars in free trade such that both counties gain from it.

3 marks

Part (b)

Figure 1.b

Sugar (tons)

1435735825500

248666058403S=80, A=50

00S=80, A=50

14703001781420092646510160 100

00 100

23844422857500

3013984145827S=40, A=80

00S=40, A=80

14373481301570010171503810 60

00 60

4307205152400Australia

00Australia

2868312882650018237206540500

260096027305002324975140249S=30, A=60

00S=30, A=60

8101742540S=40, A=30

00S=40, A=30

3702754140041551871112858

128206510604600567578517471Autos

020000Autos

544830175260Indonesia

00Indonesia

366094631750 120

00 120

196024550182 50

00 50

Assume now that in autarky, Indonesias optimal consumption point is 40 tons of sugar and 30 cars (i.e., at purple point) while in autarky Australias optimal consumption point is 30 tons of sugar and 60 cars (i.e, at yellow point). Please refer to Figure 1.b above. In autarky, these are the optimal consumption points because they correspond to the highest levels of utility for both countries.

Both countries are now allowed to trade with each other according to Ricardos principles of comparative advantage. Can Indonesia consume 80 tons of sugar and 50 cars (i.e., at blue point) by trading with Australia? Please precisely identify the price in free trade and the patterns of trade between the two countries in this case. In other words, in free trade, how many units of rice can sell for one car and how many units of rice Indonesia exports to (or imports from) Australia?

3 marks

Part (c)

Can Australia consume 40 tons of sugar and 80 cars (i.e., at green point) by trading with Indonesia? Please identify the price in free trade and the patterns of trade between the two countries in this case. Does the analysis allow us to say that both countries are better off in free trade than in autarky?

3 marks

[3 marks + 3 marks + 3 marks = 9 marks]

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

You need to read Article 1 Australia has joined forces with Brazil and Guatemala taking on India in a sugar cane subsidy dispute to answer the questions below. The article is provided at the end of this examination document.

Part (a)The article specifically mentions the following: Off the back of these subsidies India has ramped up its sugarcane production. In 2017-18 they produced 32.2 million tonnes of sugar and 30 million in 2018-19, compared to 20.3 million tonnes in 2016-17

To simplify the analysis, suppose that Australia trades with India only. Please use the concepts of supply of sugarcane and demand for sugarcane to explain why the Indian export subsidies have allowed Indias sugarcane production to increase in 2017-2018 and 2018-2019 compared to the period of 2016-2017.

3 marks

Part (b)

Provide a welfare analysis of the impact of Indias export subsidies to its sugarcane farmers on Indias welfare and Australias welfare.

Hint: Use the concepts of supply and demand to illustrate the impact of Indias subsidies on consumers, farmers/producers, and government revenues of both countries.

6 marks

[3 marks + 6 marks = 9 marks]

Question 3 (This question has two parts: a and b)

You need to read Article 2 New Zealand wins WTO appeal over Australia apple ban to answer the questions below. Please find Article 2 at the end of this examination document.

Part (a)

Given the information in the article, use the concepts of the supply and demand for apples to illustrate the situation when Australias restrictions were in place.

Hint: you can assume that the world consists of two countries: Australia and New Zealand and the two countries can trade with each other.

4.5 marks

Part (b)

Use the graphs in Part (a) to explain what happens to Australias market for apples after the WTOs appellate body largely upheld the findings of a panel of experts in August that condemned the restrictions. Compare Australias welfare in the presence of the restrictions on its apple imports and after these restrictions have been removed.

4.5 marks

[4.5 marks + 4.5 marks = 9 marks]

Question 4 (This question has two parts a and b)

Assume that the world consists of only two countries: A and B. Country As demand for rice and country As supply of rice have the following functions:

DA= 100-20P

SA= -20+20P

Country Bs demand for rice and country Bs supply of rice have the following functions:

DB=80-20P

SB=40+20P

where D, S, and P denote demand, supply, and the price in US$, respectively.

Please answer the following questions:

Part (a)

Given the information above, assume now that the government of the rice exporting country decides to apply a specific export subsidy of US$ 1 on its rice export.

Please graphically show that the effects of the specific export subsidy on the patterns of trade between the two countries in presence of the specific export subsidy.

3.5 marks

Part (b)

Determine the effects of the specific export subsidy on the welfare of the rice exporting country. In other words, please compute the three components of the exporting countrys welfare in the absence and in the presence of an export subsidy.

5.5 marks

[3.5 marks + 5.5 marks = 9 marks]

Question 5. (This question has two parts a and b)

Part (a)In 2020, the Australian foreign exchange at equilibrium is 0.50 British pound () per Australian dollar. What will happen to the Australian foreign exchange in the two following different and separate scenarios?

a.1. While in 2020, both Australia and the UK go through a period of recession, the recession in Australia is much worse than that in the UK. Please elaborate your answer using the concepts of the demand curve for Australian dollars and the supply of Australian dollars.

2.5 marks

a.2. Following Brexit, the UK adopted a less protectionist trade policy vis--vis countries that are not members of EU.

2.5 marks

Part (b)

The nominal exchange rates between the Australian dollar and the US dollar in 2019 and 2020 are as follows: 0.85 USD and 0.75 USD for 1 AUD, respectively. For the same period, the United States and Australia experience an inflation rate of 8% and 15% respectively. In other words, in 2020, the US and Australian consumer prices increase to a level 108 and 115, respectively. Does the Australian dollar appreciate or depreciate in real terms vis--vis the US dollar. Please be elaborate in your answer.

4 marks

[2.5 marks + 2.5 marks + 4 marks = 9 marks]

END OF EXAMINATION QUESTIONS

Articles 1 and 2 can be found below

Article 1 (Source: AustralianFarmers, https://farmers.org.au/news/australia-ramps-up-its-sugar-trade-dispute-with-india/).Australia has joined forces with Brazil and Guatemala taking on India in a sugar cane subsidy dispute.Last year India, the worlds second most populated nation after China, implemented subsidies for their sugarcane farmers causing a dire sugar glut.Australias sugar industry is worth $2 billion a year with 4000 cane farms, 24 sugar mills, and supports 40,000 direct and indirect jobs. Its also the worlds third largest sugar exporter after Brazil and Thailand, selling 3.7 million tonnes overseas annually.The Indian subsidies have led to a significant downturn in the worlds sugar prices hitting a decade low of 9.83 US cents a pound in September 2018. The price last week wat US12.38c/lb.In February 2019 Australia launched formal consultations with India in an attempt to stop the subsidies. India refused to budge.Australia, Brazil and Guatemala have now joined forces to ask the World Trade Organisation (WTO) to set up a dispute resolution panel to investigate whether India has breached its global trade obligations.India has not taken concrete action to respond to Australias long-held concerns and continues to provide subsidies in breach of WTO commitments, Trade Minister Simon Birmingham said.The longer these unfair subsidies continue, the greater the impact will be on our hardworking Australian cane growers and millers and regional jobs they create.Off the back of these subsidies India has ramped up its sugarcane production. In 2017-18 they produced 32.2 million tonnes of sugar and 30 million in 2018-19, compared to 20.3 million tonnes in 2016-17. The Australian sugar industry is supportive of the Australian Governments strong actions to protect Aussie cane growers.If it played by the WTO rules it committed to, India could make two important changes. It would drop its use of export subsidies and link sugarcane prices to sugar prices, CEO of the Australian Sugar Milling Council David Pietsch.WTO rules are of little use if they are not enforced. We applaud Australia, Brazil and Guatemala for taking this action, standing up for our efficient sugarcane industries.(Source: AustralianFarmers, https://farmers.org.au/news/australia-ramps-up-its-sugar-trade-dispute-with-india/)

End of article 1Article 2

(Source: Reuters, November 30, 2010)

New Zealand wins WTO appeal over Australia apple banWTO appeal body largely backs original ruling

Australian restrictions seen as unscientific

Import measures effectively banned NZ apples

GENEVA, Nov 29 (Reuters) - Australias 90-year-old restrictions on imports of New Zealand apples are unscientific and break international trade rules, the

World Trade Organizations top court ruled on Monday. The victory for New Zealand should allow it to resume apple exports for the first time since 1921 to its biggest trading partner and clear the way for sales to other markets where its fruit is also banned.

The WTOs appellate body largely upheld the findings of a panel of experts in August that condemned the restrictions, which New Zealand says amount effectively to a ban on its fruit, and called on Australia to bring its regulations into line with international trade rules. Like many disputes about trade in food, this one turned on health and safety standards. Australia imposed the restrictions in 1921 to protect local apple trees from fire blight, a pest that also affects pear trees and rose bushes.

But New Zealand argued that the restrictions, revised in 2006, were unscientific, a view backed by the original WTO panel which did not find in favour of New Zealand on all counts. Australia said it was appealing that ruling to protect Australian agriculture from health risks.

New Zealand officials estimate that lifting the Australian ban could boost apple exports by NZ$30 million ($22.4 million) over two to three years from NZ$400 million in 2009 good news for New Zealand producers such as Turners & Growers TUR.NZ.

A recent study by Malcolm Bosworth and Greg Cutbrush, two visiting fellows at the Australian National Universitys Crawford School of Economics and Government, found that the ban had driven up the price of apples for

Australian consumers. The study, backed by New Zealands apple growers association, Pipfruit, said Australia had the second most expensive apples in the world, after Japan, and the restrictions had effectively transferred A$2 billion ($1.93 billion) to Australian growers from consumers between 2001/02 and 2007/08.

End or Article 2 (Source: Beef Central, April 20, 2020)