Opportunity Costs Analysis - Assignment Example

Questions to solve Name: Number: Course: Tutor: Date: Question one (a) The autarky price ratio of the price of wool Y in units of computers W in the two countries In Australia P y/Pw = WAGES Australia x HOURS Australia y/WAGES Australia x hours Australia w =5/60= 0.083 meaning the price of wool is 0.083 computers In japan P y/Pw = WAGES japan x HOURS japan y/WAGES japan x hours japan w =4/32= 0.125 meaning the price of wool is 0.125 computers Opportunity costs (Australia) Wool computers 5/60 = 0.083 60/5= 12 Opportunity costs (Japan) Wool computers 4/32 = 0.125 32/4= 8 Japan has an absolute advantage in both wool and computers since it requires fewer resources to produce and equal amount of goods. Australia has a comparative advantage in wool since from the autarky price ratio relative the price of wool is less in Australia. From the opportunity cost it is also clear that Australia can produce wool with lower opportunity cost.Japan has comparative advantage in computers because it can produce computers with lower opportunity cost than Australia.From the autarky price Australia will have to export wool to japan while Australia will have to import computers from japan Question one (b) In autarky in Australia it takes twelve wools to buy a computer. If it only takes nine wools to import the same computer Australia will save 5.3 days of labour /computer. In Japan, in autarky it takes 1/8 of a computer 4 days to acquire one computer if with trade it only takes 1/9 of a computer 3.56 days/wool, Japan saves 0.44 days/wool import. Australia saves 5 days of labor/computer; Japan saves 1.1 days of labor/wool. As the international terms of trade move close to those of Australia in autarky, the benefits that accrue to Japan rise and the benefits that accrue to Australia reduces. Question one ( c) Question four (a) The demand curve of VCRs set: Pd=500-20*Q The supply curve of VCRs set Ps=20*Q Price of VCRs is 250. The quantity demanded and quantity supplied is 50 Question four (b) Consumer surplus is triangles black. Thus, this area is equal to0.5*50*250=6250 Producer surplus is triangles red. Thus, this area is equal to0.5*50*250=6250 Question four (c) Produced 20, consumed 80, and imported 60 Consumer surplus 0.5*400*80=16000 the consumer surplus increases by 9750 Producer surplus0.5*20*100=1000 the producer surplus decreases by 5220 Question four (d) With the tax of Australia government imposed on VCRs set, price increase to 225. Quantity of TV sets supplied by Australian producers: 20 to 45. The quantity of TV sets demanded: 80 to 67.5 Volume of trade: 60 to 20 Question four (e) The reduction in new consumer surplus: （225-100）*67.5+（20*100）/2=$5219. Welfare loss:-5219 Effect of consumption: 500 The effects of protective: -$4000 The redistributive effect: $3250. Revenue Effect: 20* $50(tariffs) = $1000. Question four (f) The welfare Deadweight loss is equal to change in consumer surplus added to change in producer surpluses added to change in government revenue. Change in consumer surplus: (-) 0.5*(67.5+80)*100=7375 Change in producer surpluses (+) 0.5*(45+20)*100=3250 Change in government revenue (+) 100*(67.5-45) =2250 Welfare Deadweight loss:-7375+3250+2250=-1875 Hence, the amount of deadweight welfare loss imposed on the Australian economy by the tariff is 1875. Question six (a) Good X in country A IIT={(1-| Xij-Mij|/ (Xij+mij)}*100 ={1-|5000-3000|/8000}*100=75 Good Y in country A: IIT= {(1-| Xij-Mij|/ (Xij+mij)} = 0.6 Good Z in country A: IIT= {(1-| Xij-Mij|/ (Xij+mij)} = 0 Good R in country B: IIT= {(1-| Xij-Mij|/ (Xij+mij)} = 0 Good S in country B: IIT= {(1-| Xij-Mij|/ (Xij+mij)} =0.148 Good T in country B: IIT= {(1-| Xij-Mij|/ (Xij+mij)} =0.7317 Good M in country C: IIT= {(1-| Xij-Mij|/ (Xij+mij)} =0.8235 Good N in country C: IIT= {(1-| Xij-Mij|/ (Xij+mij)} =0.8 Good O in country C: IIT= {(1-| Xij-Mij|/ (Xij+mij)} =0.8372 Question six (b) Country A: IIT=1-{|5000/9000-3000/10000|+4000/9000-1000/10000|}/ (5000/9000+3000/10000) + (4000/9000+1000/10000)=0.5 (1-(0.556-0.3)+(0.444-0.1))/(0.556+0.3)+(0.444+0.1) =0.4/1.4 =0.2857 Country B: ITT=1-{|400/7000-6000/6500|+|2600/7000-1500/6500|}/ (400/7000+6000/6500+2600/7000+1500/6500)=0.2 (1-(0.0571-0.923+0.371-0.231) =1.7258 0.0571+0.923+0.371+0.231=1.5821 = 1.091 Country C: ITT=1-{(|4000/7500-2800/6100|)+ (|1000/7500-1500/6100|)+ (2500/7500-1800/6100)}/(4000/7500+2800/6100)+(1000/7500+1500/6100)+(2500/7500+1800/6100) 1-((0.533-0.459)+(0.133-0.2459)+(0.333-0.295))=1.001 0.533+0.459+0.133+0.2459+0.333+0.295=1.9989 =0.5 Question six(c) From the IIT index, Country A has a low number of intra-industry trade, it is only 0.2857. In the Country A, the amount of export and import has large difference. Country C also has a low number of intra-industry trades, it is 0.5, and this situation is similar to country A. On the other hand, country B has a high amount of intra-industry trade, it is 1.091, and it shows that the export and import percentages are very similar in this country. Question seven (ii) Wi =is the % occupancy of a country in exports and imports sum. And the sum exports and imports=37105+ 17781+ 9535+ 24051+ 7212+ 5773+ 8030+ 6998+ 5035+ 10924+ 46448+ 36368+ 2717+1129= 219106 Wi Japan = (37105+17781)/ 219106=0.2505, Wi USA = (9535+24051)/ 219106=0.153287 Wi UK = (7212+5773)/ 219106=0.059264 Wi NZ = (8030+6998)/ 219106=0.068588 Wi SG = (5035+10924)/ 219106=0.072837 Wi China = (46448+36368)/ 219106=0.377972 Wi Hong Kong = (2717+1129)/ 219106=0.017553 Question seven (iii) Rindex is simply nominal exchange rate at the moment divided by the base rate Index 2011 of Japan=86.56/63.81=1.3565 Index 2011 of USA=1.0557/0.6433=1.6411 Index 2011 of UK=0.6520/0.4545=1.4345 Index 2011 of NZ=1.3360/1.2812=1.0428 Index 2011 of SG=1.3157/0.9985= 1.3177 Index 2011 of China=6.8615/4.3963= 1.5607 Index 2011 of Hong Kong=8.2090/4.9916=1.6446 NEER=1.3565*0.2505+1.6411*0.153287+1.4345*0.059264+1.0428*0.068588+1.3177*0.072837+1.5607*0.377972+1.6446*0.017553=1.462646 Due to an EER=1.463 which is greater than1 and the rate of exchange is defined in foreign currency per A$ thus the Australia dollar appreciates 46% between 2009-2011. Question eight (iii) Japan: RER2011= 86.56*(106.3/99) =92.94 USA: RER2011=1.0557*(106.3/105.2) =1.07 UK: RER2011=0.6520*(106.3/107.8) =0.64 NZ: RER2011=1.3360*(106.3/106.0) =1.34 SG: RER2011=1.3157*(106.3/106.8) =1.31 China: RER2011=6.8615*(106.3/107.1) =6.81 Hong: Kong: RER2011=8.2090*(106.3/106.6) =8.19 REER= ∑ Rindex *Wi= (92.94/63.81)*0.2505+ (1.07/0.6433)*0.1533+ (0.64/0.4545)*0.0593+ (1.34/1.2812)*0.0686+ (1.31/0.9985)*0.0728+ (6.81/4.3963)*0.3779+ (8.19/4.9916)*0.0176=1.4849 Question eight (iv) According to me because REER is greater than one A$ has appreciated on a mean of 48% across the 2009-2011 period. This indicates that the competitiveness of Australia will reduce during this period. This can only be attributed to the fact that A$ appreciates 48% means the products of Australia become costly 48%. Buyer will refer inexpensive products as opposed to Australian products. Reference Read More