International Economics: Australia - Assignment Example

International Economics Student’s Name University Name QUESTION 1 (A) (B) The relative opportunity cost of producing steel to aluminium is better off in France when compared to Canada. In France, the production of steel is preferred rather than in Canada. The two nations should specialize. France should specialize in production of Steel while Canada should specialize in the production of aluminium. The level of specialization is complete. The act of specialization yields increased output for specific product when compared to the production at times of no trade. At specialization point, Canada produces 1500 tonnes of aluminium, an excess of 900 tonnes when compared to production at times of no trade. France produces 1200 tonnes of steel at specialization level but at absence of trade period, it produces 600 tonnes, an extra 600 tonnes of steel is achieved as a result of specialization. (c) If specialization and trade occur, then Canada will produce 1500 tonnes of aluminium and France will produce 1200 tonnes of steel, if they trade on the basis of the ratio 1:1, then this will benefit the Canadians. They will have a surplus of 300 tonnes of aluminium for domestic use. The French consumers will not have enough steel for domestic use. (d) Canada pays for its imports which is the steel from the earnings it gets from the sale of aluminium to France. Canada also pays for the steel imports from the sale of surplus steel to its domestic market. France can only pay for its imports (aluminium) from the foreign exchange it gets after selling steel. Question 2. (a) China is the labour abundant country while Japan forms the capital abundant country. Exports from a capital-abundant country are from capital-intensive industries and labour-abundant countries normally import those kinds of goods but export labour-intensive goods. (b) It is hand-made rugs industry that is labour-intensive because it is producing hand-made rugs while robotic industry in Japan forms the capital intensive industry. This is because the exports of a capital-abundant country will be from capital-intensive industries. (c) Trade triangles Question 3 (a) The value added to the Australian television industry is worth $300. (b) Value added of the Australian television industry will remain constant. The effective rate of protection provided to the Australian producers of television sets is 10% 20% of 300 = 60 10% of 300 = 30 (60-30) / 300 = 0.1 = 10% (c) 8% of 200 = $16 14% of 100 = $ 14 14+16+60 = $90 (90-30) / 300 = 0.2 =20% (d) 50% of 200 =$50 35% of 100 = $35 50 + 35 + 60 = $145 (145-85) / 300 = 0.2 = 20% Question 4 (a) Australia would import the computers from China. They are cheaper than those from Japan. Computers from china would only cost $600 a unit while those from Japan would cost $700 a unit. The consumption of this product would still be high because demand of the computer units is greater than the supply of the computer units. (b) When Australia forms a Free Trade Area with Japan, Australia will still import from Japan rather than china. This is because domestic prices have lowered; the cost of a computer unit will only cost $500 rather than the former $600 from china. The consumption will rise because more people can now afford to buy the product and the supply of these units of computers to Australia will rise to cater for the increased demand. The Australia’s welfare increase due to the Free Trade Agreement. There is trade diversion as Australian turns from more efficient exporter of computers (china) to less efficient exporter of the same (Japan). Due to the new lesser prices of Japanese computers, Australians have created more efficient trade with them. (c) If a tariff of $300 were imposed on the Chinese computers, then they would be very expensive ($700) thus every Australian would opt for the Japanese product. This is very beneficial for the Japanese as they would monopolize the product market and make huge profits. Question 5 Qd = 90,000 - 30P Qs = 5,000 + 20P Where Qd = Quantity demanded, Qs = Quantity supplied, And P = Price (in NZ$) = NZ$1,200 (a) The domestic supply of steel in the country is governed by the following relationship; Qs = 5,000 + 20P Qs = 5,000 + 20(1200) = 29000 units. 35000 = 5000 + 20 (p) P = NZ$1,500 So as to achieve a production of 35000 units, a tariff must be introduced for the imported steel. The imported steel must be more expensive or of same price as domestically produced steel. The government need to impose an import tariff of about $300 for every unit imported. Therefore imported steel would cost $1500 for every unit. (b) Recalculate. Qd = 90,000 - 30P Demand at p =$1200; {90000-(30*1200)} = 54000 units Demand at p =$1500; {90000-(30*1500)} = 45000 units Dead weight loss; [{1500-1200} * {54000-45000}] = NZ $2700, 000. (c) (d) In order to achieve a domestic production rate of 35000 units, a subsidy of $300 per unit. (e) Subsidy is (P0-P2) and the Supply curve shifts to S2 and price falls from P1-P2. Consumer quantity increases from quantities Q1 to Q2 and Q2 lies at the social efficiency point. (f) The total cost of subsidy to the government is $300 per unit. To achieve a domestic production of 35,000 units then the total subsidy is {300 * 35,000 =NZ$10,500,000} (g) Tariff leads to decline in the consumer’s welfare. This is because the tariff makes the price of steel per unit more expensive while subsidy from the government ensures that the product is cheaper. Thereby increasing consumption. (I) the dead weight loss as a result of subsidy Qd = 90,000 - 30P Qs = 5,000 + 20P 90000-30P = 5000+20P P= NZ$1700 Qd = 90000-30(1700) = 39000=Qs Our new Qs = 5000+20(p+300) P = NZ$1580 Qd = 90000-30(1580) = 42680 and Qs =5000 + 20(1580+300) = 42600 Dead weight loss = 0.5*300* (42680-39000) = NZ$ 552,000 (j) I would recommend the subsidy policy to the prime minister of New Zealand. This is because the domestic production will rise and the product price will be cheap hence affordable to the general public. Question 6 Intra-industry trade index = (exports-imports) / (exports + imports) E.g. Good X (exports) $7000 (imports) $3000 Trade index = (7000-3000) / (7000+3000) = 0.4 (a) Country A TRADE INDEX GOOD X 0.4 GOOD Y 0.55 GOOD Z 1 Country B GOOD R -1 GOOD S 0.2785 GOOD T 0.2157 Country C GOOD M 0.2784 GOOD N 0.2414 GOOD O 0.2418 (b) COUNTRY TRADE INDEX A 0.63077 B 0.36054 C 0.23984 (c) When the value of the trade index is greater than zero, it implies that the specific country under consideration is in surplus and posses a comparative advantage aspect. Countries A, B and C have their trade indexes greater than zero. This means they are surplus situation. Country A, exports more goods than it imports, this means that it is in surplus of goods that it exports. It therefore earns a lot as a result of export goods. Country B spends more capital or money on importing goods than it actually earns from exports. Therefore it is less sufficient. Country C, exports more than it imports. This means that it earns more money as a result of exports and spends less money on importing the goods. Therefore this articulates that countries A and C are better economical performers when compared to country B. Question 7 (I) APPRECIATION (%) DEPRECIATION (%) ¥ vs. $A1 = 17.85 $US vs. $A1 = 13.64 £ vs. $A1 = 19.76 $NZ vs.$A1 = 4.48 $SG vs.$A1 = 0.21 Renminbi vs. $A1 = 2.72 Hong Kong $ vs. $A1 = 14.41 (II)Calculation of trade weights Trade weight = {(xi + mi) / ∑n (xi + mi)} Where; Xi- total exports from Australia to country i Mi- total imports from Australia to country i n- The number of Australia trading partners Trade weight of ¥ vs. $A1 N=6, trade weight = {69230/332677} = 0.2081 Trade weight of $US vs. $A1 =0.1619 Trade weight of £ vs. $A1 =0.0632 Trade weight of $NZ vs. $A1 =0.06029 Trade weight of $SG vs. $A1 =0.0599 Trade weight of Renminbi vs. $A1 =0.3937 Trade weight of Hong Kong $ vs. $A1 =0.0231 (iii)Effective exchange rate (EER) is also referred to as trade weighted effective exchange rate. EER = ∑n [{Exchange rate * Trade with country i}/ total trade] Where “n” is the number of trading partners. EER= {(91.64*0.2081) + (0.9221*0.1619) + (0.6072*0.6032) + (1.1871*0.06029) + (1.1725*0.0599) + (5.6991*0.3937) + (7.1946*0.0231)} EER= 22.137568969 The Australian dollar has depreciated from a rate of 24.78288 in (2009) to 22.137568969 in (2013). Question 8 (i) Bilateral exchange rate is defined as the number of units of the currency with the lower value per unit of the currency of the higher value. ¥ 91.64 = $A1 (98.9/110.7) * 91.64 = ¥ 81.87= $A1 $US 0.9221= $A1 (109.1/110.7) * 0.9221= $US 0.9088= $A1 £ 0.6072 = $A1 (114.5/110.7) * 0.6072 = £ 0.6281= $A1 $NZ 1.1871 = $A1 (109.2/110.7) * 1.1871 = $NZ 1.1710= $A1 $SG 1.1725 = $A1 (114.6/110.7) * 1.1725 = $SG 1.2138= $A1 Renminbi 5.6991= $A1 (101/110.7) * 5.6991 = Renminbi 5.1997= $A1 $7.1946 = $A1 (114.5/110.7) * 7.1946 = $7.4416= $A1 (ii)Rate of change of the real bilateral exchange rates (a) {81.87-91.64 }/91.64 = 0.00009749 (b) {0.9088-0.9221}/0.9221= -0.01442 (c) {0.6281-0.6072}/0.6072= 0.03442 (d) {1.1710-1.1871}/1.1871= -0.01356 (e) {1.2138-1.1725}/1.1725= 0.03522 (f) {5.1997-5.6991}/5.6991= -0.08763 (g) {7.4416-7.1946}/7.1946= 0.03433 (iii) Real effective exchange rate (REER) index for 2013. REER = [{nominal exchange rate * foreign price index} / domestic rice index] W Where the notation “w” is the weight of the currency ¥ Vs. $A1 W= 0.2081 REER = [{91.64 * 98.9}/100]0.2081 = 2.5545 $US vs. $A1 W= 0.1619 REER = [{0.9221* 109.1} / 100] 0.1619= 1.0009 £ Vs. $A1 W= 0.0632 REER = [{0.6072 * 114.5/100}]0.0632=0.9773 $NZ vs. $A1 W= 0.06029 REER = [{1.1871 * 109.2/100}]0.06029= 1.0158 $SG vs. $A1 W= 0.0599 REER = [{1.1725 * 114.6/100}]0.0599=1.0179 Renminbi vs. $A1 W= 0.3937 REER = [{5.6991 * 101.0/100}]0.03937= 1.0713 Hong Kong $ vs. $A1 W= 0.0231 REER = [{7.1946 * 114.5 /100}] 0.2031= 1.5346 (iv) Australia`s international competitiveness usually affects its total national production levels, the income and also the employment status. Therefore a fall in Australia`s competitiveness, implies that the goods and services manufactured and produced respectively in Australia will experience a difficult to certain extent in finding the potential buyers both domestically and internationally. References Sloman, J., & Sutcliffe, M. (1998). Economics for business. London: Prentice Hall. Lafrance, R., & Bank of Canada. (1998). Evaluating alternative measures of the real effective exchange rate. Ottawa: Bank of Canada. Appannaiah, H. R., Reddy, P. N., & Shanthi, S. (2009). Economics for business. Mumbai [India: Himalaya Pub. House. Dunn, R. M., & Mutti, J. H. (2004). International economics. London: Routledge. Mantell, L. H., & Sing, F. P. (1972). Economics for business decisions. New York: McGraw-Hill. Harrod, R. (1958). International economics. Chicago: University of Chicago Press. Salvatore, D. (2001). International economics. New York: John Wiley. Anderson, D. R., Sweeney, D. J., Williams, T. A., & Anderson, D. R. (1984). 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