International Economics: Theory and Policy - Assignment Example

Name Tutor Course Date Question one a) Internal economies of scale are advantages that a firm enjoys for its expansion. They normally occur when an individual firm reduces its costs as its production increases. Internal economies of scale do not depend on entire industry, but rather on the size of individual firm. They only occur in the long run and depends on individual firms actions. A good example of internal economies of scale is when a big firm is able to acquire funds on favorable conditions. External economies of scale normally occur outside a firm, but within an entire industry. They are achieved if the growth of entire industry or firms’ group results to costs reduction for each firm. External economies of scale do not depend on each firm individual action. A good example of external economies of scale is when industry’s size of operation increases due to development of good transportation network, thus resulting into reduced costs for firms working within the industry. Intra-industry trade is a trade in which a nation import and export within same industry. It is the trading of similar goods and services that belongs to same industry. A good example intra-industry trade is when Korea imports and exports cars (Eicher et al 220). Dumping refers to a situation in international trade in which a given nation or country floods the market of another country with low priced products. A good example of Dumping is when Japanese exports steel inventories in United States of America market at a price that domestic steelmakers cannot compete with. b) Export subsidy is a government policy that aims at encouraging export of domestically produced commodities and discourages the sale of same products on domestic market. Import tariff refers to tax imposed by governments on goods and services that are brought into a country. Governments do always impose import tariffs so as discourage domestic consumers from purchasing commodities from foreign countries. Therefore, these two policies have similar effect on aggregate supply. The use of export subsidy reduces aggregate supply since the policy encourages the exportation of domestically produced products and discourages the sale of similar products on domestic market. Import tariffs do also reduce aggregate supply. Governments do always use import tariffs to discourage importation of goods and services, thus reducing aggregate supply (Krugman et al 185). c) Dynamic economies of scale refer to a situation in which returns to scale increases with a decline in average cost. It normally occurs when average costs reduce as aggregate output over time increases. Dynamic economies of scale can also be referred to as dynamic external economies of scale. A good example of dynamic economies of scale is when a firm uses cheaper inputs such as labor to produce more outputs. Economies of scale on the other hand are situations in which external factors such as good transport facilities causes the total costs of the firm to go down. In external economies of scale, cost of production normally depends on the entire size of the industry. A good example of economies of scale is when establishment of local education assist local population to acquire skills required to an industry, if the industry is a huge provider for local employment. This therefore makes an industry to incur less cost, particularly on training of staffs. Dynamic economies of scale and external economies of scale can be illustrated graphically as shown below. From the graph, economies of scale can be explained by the average cost curve, that is, as a firm increases its output from 1000 to 13000, the unit cost of production reduces from $400 to $200. Economies of scale is therefore experienced a long the average cost curve, that is, at a point where the unit cost reduces with an increase in output. From the graph, dynamic economies of scale can be explained by considering the long run average cost curve. Dynamic economies of scale are experienced when a firm increases its output from Q2 to Q1. The increase in output causes the average cost to reduce to AC1, thus experiencing dynamic economies of scale. Question two a) Country B will lose if it trades with country A. Country A will export its products to country B at low price since it is experiencing economies of scale, thus killing software industry in country B. This can be explained graphically as shown below. Competitive supply curve Price Monopoly supply with EoS Monopoly Demand curve MR q1 q2 quantity b) The reduction of exports of rare-earth minerals by china government is inappropriate according to international trade policy. China’s imposition of restrictions on exports and hoarding of metals is against trade policy. As a member of world trade organization, china should not impose any restrictions on its exports, by either hording its metals or reducing its exports. The reduction and hoarding of metals have a great impact on unemployment, in both United States of America and other nations. Hoarding of metals or restrictions of exports will make unemployment rate for other nations to increase. Unemployment rate will increase due to the fact that many countries using the metals as raw materials will opt for other alternatives, which might be more expensive, thus increasing production costs. Increase in production costs will force many companies to close down, leaving many people without jobs. The restrictions of exports of rare-earth minerals will reduce the trade volume of China. Many nations will avoid trading with china. They will also restrict exportation of essential goods to China, thus reducing China’s Trade Volume. The export restrictions by China will affect world demand, supply and prices of rare metal. The restrictions will increase the world demand of rare metal. The demand will increase due to scarcity of rare metals in the world market. The world supply of rare metals will reduce. The world prices for rare metals will increase. The increase in prices will be due to metals’ high demand. I do not agree with the statement since there is always an optimal point for producing or extracting resources. The optimal point is usually both economical and environmentally friendly. If China wants to protect resources, it needs to opt for operating at optimal rather than reducing exports of rare metal. Question three a) P= 50-Qdd, P= 2.5 + 1/2Qss, where P denotes price and Q denotes quantity Qdd = 50-p Qss = 2P-5 At equilibrium quantity demanded (Qdd) is equal to quantity supplied (Qss) Qdd=Qss 50-P=2P-5, 3P=55, P =55/3 P= 18.33333 Qdd=50-P Qdd =50-18.33 = 31.667 = 31.67 Price SS Consumer 18.33 Surplus 10 Producer Surplus DD 15 31.67 40 Quantity When quantity demanded is 0, p = 50, consumer surplus will therefore be 50-18.33= $31.67 When quantity supplied is 0, 2p= 5, P=2.5, producer surplus will therefore be 18.33-2.5=$15.83 b) Domestic production P= 2.5+1/2Q, at a price of 10 Domestic production will be Qss= 2P-5 Domestic production will be 20-5= 15 Domestic consumption will be P= 50-Qdd, when P=$10, Qdd=50-10= 40 Domestic production =domestic consumption-imports Imports= domestic consumption-domestic production Imports= 40-15= 25 Gain in consumer surplus will be 50-10=$40, gain therefore is 40-31.67= $11.67 Loss in producer surplus will be 18.33-10=$8.33, loss in producer surplus is 15.83-8.33= $7.5 c) Domestic production will be Qss= 2P-5, at a price of $15, Domestic production will be 30-5= 25 Domestic consumption will be P= 50-Qdd, when P=$15, Qdd=50-15= 35 Imports= consumption – production= 35-25= 10 If a tariff of $5 dollars is imposed on each bag, domestic production will increase to 25 units, domestic consumption will reduce to 35 units, imports will reduce to 10 units and there will be a gain in producer surplus and a loss in consumer surplus. This can be shown graphically as follows Price ss 18.33 15 10 dd 15 25 31.67 35 40 If the government provides a subsidy of $5, the price for imports will be $10-$5= $5 Domestic production will be Qss= 2P-5, at a price of $5, Domestic production will be 10-5= 5 Domestic consumption will be P= 50-Qdd, when P=$5, Qdd=50-5= 45 Imports= consumption – production= 45-5= 40 Price ss 18.33 5 dd 0 5 31.67 45 Quantity A subsidy causes a loss in producer surplus and a gain in consumer surplus Question four a) The bilateral and regional agreements will greatly increase trade flows among countries. The main aim of bilateral and regional agreements is to reduce trade barriers among countries. Therefore by involving in these agreements, member nations will incur lower tariffs on merchandise trade. Bilateral and regional agreements will also reduce non-tariff barriers on merchandise trade. The agreement will reduce investment barriers and service trade barriers, thus promoting both export and imports (Carbaugh 310). b) Bilateral and regional agreements do have a number of costs and benefits on other trading partners. The agreements can be concluded faster. Bilateral and regional agreements entail fewer members. Therefore, few members in the agreement imply that preferential trade agreements can be completed within a very short period of time. This is usually essential to politicians and other trading partners who are after quick outcomes. Another benefit of bilateral and regional agreements is that trading partners can easily access new territories. Bilateral trade and regional agreements are also essential to negotiators. The agreements enable negotiators to know how to negotiate. This normally improves trade institutions of a country. Bilateral and regional agreements do also have some costs. The completion of preferential trade agreements can easily develop an incentive for discrimination. This normally affects the trading partners. The preferential agreements formed against competitors are usually short lived. The agreements can also fail to solve systematic matters. Systematic matters such as antidumping rules, fisheries and agricultural subsidies can be solved by preferential agreements. c) No. These agreements will not bring any distortions. The Australia’s preferential trade agreements (PTAs) basically have provisions that aim at minimizing distortions such as discrimination among domestic service providers and other partner nations. The PTAs also incorporate plans for creating mutual acknowledgement of standards and professional qualifications. d) The formulation of preferential agreements will affect Australia in several ways. The preferential agreements will enable Australia to remove tariffs on every qualifying commodity from AANZFTA members. The introduction of preferential agreements will enable Australian exporters to acquire tariff concessions. The preferential agreements will also result to negotiation of several appreciable minimizations of tariff barriers experienced by Australian suppliers in partner nations. The tariff reductions on imports will enable Australia to acquire cheaper inputs from partner nations, thus making the Australian firms to experience low costs of production (AUPC 65). Work cited Australian Government Productivity Commission (AUPC). Bilateral and Regional Trade Agreements. March 31, 2012 http://www.pc.gov.au/data/assets/pdf_file/0010/104203/trade-agreements-report.pdf Carbaugh, Robert. International Economics. New York: Cengage Learning, 2010. Print. Eicher, S, Theo, Mutti H., John and Turnovsky H., Michelle. International Economics. New York: Taylor & Francis, 2009. Print. Krugman, Paul R, Maurice Obstfeld, and Marc J. Melitz. International Economics: Theory and Policy. Harlow: Pearson Education Ltd, 2011. Print. Read More