International Trade and Payments - Assignment Example

INTERNATIONAL TRADE AND PAYMENT STUDENT’S NAME: INSTRUCTOR’S NAME: COURSE CODE & NAME: DATE OF SUBMISSION: Question one a. The autarky points Canada: France: b. Specialization The level of specialization is determined by the slope of production possibility frontier curve. From the illustration above, the opportunity cost of producing each metal is explained in table below; Opportunity cost Steel Aluminium Canada 3 tons of aluminium 1/3 tons of steel France 2/3 tons of aluminium 3/2 tons of steel From table above, we are able to note that Canada has comparative advantage in production of Aluminium since for every 1tons of steel foregone; it produces 3 tons of aluminium using the same resources. Consequently, France has comparative advantage in production of steel since for every 1 tons of aluminium foregone, it produces 1.5units of steel. The specialization of the two countries proves beneficial since Canada has comparative advantage over production of aluminium by 3tons and France has comparative advantage in production of steel by 1.5tons (Krugman, 1996). Therefore, under complete specialization consumers are going to gain since Canada is able to produce 1500tons of Aluminium and France is able to produce 1500tons of steel. The cost of production will be much lower than when specialization is absent thus, lower prices charged to consumers. c. Limit for the terms of trade Canada PPF France PPF Given the terms of trade as 500:500 for aluminium to steel, then France will produce 1500tons of steel and export 500tons. They will consume remaining 1000tons. On the other hand, Canada will produce 1500tons of aluminium and consume 1000. They will export remaining 500tons to France. d. Trade triangle The trade triangle that exists between the two countries shows that Canada will import 500tons of steel and export 500tons of aluminium. The remaining 100tons of aluminium will be consumed locally. On the other hand, France will import 500tons of Aluminium and export 500tons of steel to and from Canada respectively. Question two a. Country which is relatively labour, and capital abundant. According to Worldometers (2016), China has relatively high population of over 1.382billion compared to Japan which has over 126million. Consequently, Japan is considered more advanced in industrialization than China. Therefore, Japan is considered more capital intensive than China as a result of small population and advanced industrialization. On the other hand, China is more labour intensive than Japan due to high population and relatively lower industrialized than Japan. b. Industry that is capital abundant and labour abundant The production of rug is less automated thus requires more use of labour than capital thus, its production is labour intensive than use of capital. Subsequently, production of Robots is more automated thus more capital intensive than labour. c. PPF graphs Japan Japan is capital-intensive country. Rug production is labour intensive while Robot production is capital intensive. The graph is skewed to the left side since it produces more robot than rug (Krugman & Obstfeld, 2000). China China is labour-intensive country because it has high supply of labour than capital. Rug production is labour intensive while robot production is capital intensive (Krugman & Obstfeld, 2000). The graph is skewed to the right since the country can produce more rugs than Robots. The trade between the two countries exists since Japan can import rugs which are labour intensive i.e. scarce resource but export robots since it produces in abundant because of excess capital. China will export rugs since it has abundant labour but import robots because capital factor is scarce (Krugman & Obstfeld, 2000). Therefore, interaction between the two countries is fostered by the differences in production factors. d. The “Trade triangle” Japan China Question three The tariffs are used in international trade with the aim of protecting the country from effects of dumping and domestic industry. The tariff makes imported goods expensive or same price as locally produced goods to ensure fair competition since other countries might produce the same product at a lower cost (Krugman & Obstfeld, 2000). a. Common tariff Equilibrium price and quantity; Qs=Qd=Q Q s= 2P-1100 Q d= 2900-3P 2P-1100 = 2900-3P 5P=4000 P = 800 Q = 800*2-1100 Q= 500 Therefore; Domestic price is $800 per computer while quantity is 500 units. If Australia import from Japan; Q s= 2P-1100 Q d= 2900-3P Where; P =500+200=$700 Therefore; Supply = 2*700-1100 =300units Imported units from Japan is 300units Demand = 2900-3*700 = 800units Domestic production = Domestic demand (Equilibrium)-import = 800-300 = 500units Therefore; Australia will import 300 units from Japan and produce 500units to achieve the same level of consumption at original equilibrium in a closed economy. The trade will be beneficial for the consumers since they will get access to cheap computers, while the producers will be disadvantaged from fall in demand as a result of cheaply imported computers (Krugman & Obstfeld, 2000). If Australia import from China; Q s= 2P-1100 Q d= 2900-3P Where; P =400+200=$600 Therefore; Supply = 2*600-1100 =100units Imported units from China is 100units Demand = 2900-3*600 = 1100units Domestic production = Domestic demand (Equilibrium)-import = 800-100 = 600units Therefore; China producers will agree to export 100units with custom tariff of $200. Thus, local producers will have to produce 600units to meet excess demand on local consumption. The consumers are going to benefit from cheaper price but producers are going to suffer due to lose of demand from local market. b. Australia Free Trade Area with Japan The free trade area between Australia and Japan proves beneficial for the two countries in diversion of China computers to the two countries. The tariff placed to china makes its computers price ($600) expensive compared to Japan’s price ($500). Therefore, Australia will prefer to consume computers from Japan than computers from China thus, creating trade within the free trade area. Though, the Australian producers will not benefit much since they are willing to sell at $800 but Japan producers are willing to sell at $500. The consumers will gain due to increased competition and benefit from relatively cheap products. The China producers can compete with local producers since after placing tariff; their products are still cheaper than local producers’ prices (Mikić, 1998). c. Increase of tariff to $300 with the free trade area between Australia and Japan The effect of increase in tariff will have effect in one dimension that is; Domestic producers will have a small margin to adjust their cost of production to favourably compete with China producers. China products will trade at $700 while Australian computers will trade at $800. Thus, margin is reduced to $100 compared to previous margin of $200. On the other hand, Japan producers will remain unaffected since they are still able to sell at $500 making its products much cheaper than Australia and China. Therefore, benefit of joining free trade area with current tariff is relatively high compared to the previous tariff. The agreement will improve trade partnership between the two countries and divert Chinese imports. Though, Japan will be the highest winners in the trade agreement than Australia (Mikić, 1998). Question four Tariff protection is important in shielding domestic industries from unfair competition from industries in other countries which enjoy large economies of scale or low cost of production. Also, it provides a good mechanism in adjusting the prices of the commodity as a result of inflation or deflation since effective rate adjust with changes in prices (Shamah, 2003). The following shows calculation of effective rate of protection; a. Effective Rate Of Protection Car Price=$25,000 Steel price =$10,000 Value add in free trade = $25,000-$10,000 = $15,000 Duty=$25,000*0.25=$6,250 Tariff protected price = 25,000+6,250= $31,250 Value add for the tariff protection = $31,250-$10,000 = $21,250 Effective rate of protection =  ERP= *100 =41.7% b. Effective rate of protection when import of steel tariff is set at 20% Value add from protection tariff Tariff protected price Car price =25,000+6,250= $31,250 Steel price = $10,000 +$10,000*0.2=$12,000 Value add from protection = $31,250 - $12,000 = $19,250 Effective rate of protection =  VA = 15,000 ERP= *100 =28.3% c. Effective rate of protection when Copper is added Car Price=$25,000 Steel price =$10,000 Copper price = $3,000 Value add in free trade = $25,000-$10,000-$3,000 = $12,000 Duty=$25,000*0.25=$6,250 Tariff protected price = 25,000+6,250= $31,250 Value add for the tariff protection = $31,250-$13,000 = $18,250 Effective rate of protection =  ERP= *100 =52.1% d. Effective rate of protection when import of steel tariff is set at 20% and 15% copper Value add from protection tariff Tariff protected price Car price =25,000+6,250= $31,250 Steel and copper price = $13,000 +3,000*0.15+$10,000*0.2=$15,450 Value add from protection = $31,250 - $15,450 = $15,800 Effective rate of protection =  VA = 15,000 ERP= *100 =5.33% Question five Country A Country B Country C Price of X $25 $16 $18 Non-Discriminatory 100% Custom Union Custom union Non-discriminatory tariff Country A will stop producing and imports goods consumed from country B. The granting of 100% ad valorem by country A will lead to increased competition between the country A producers with country B and C. Due to economies of scale in country B and C, consumers in country A will prefer to consume imports than domestically produced goods. The reduction in demand of the domestically produced goods will lead to collapse of domestic producers (Shamah, 2003). Therefore, Country A will import goods that are consumed domestically than produced due to low comparative advantage in production compared to country B and C. Custom union The country A will produce good X and bridge shortages from Country B. The custom union enables the trading blocks to impose common tariffs to the external trading nations (Country C). The member bloc countries might have different imports quotas among themselves but common tariffs to non-member (Shamah, 2003). The bloc will enable country A to import good X when it is facing shortage i.e. ensuring that the quota compensate the shortage that arises from low production from domestic industries. The custom union will result to creation of trade between country A and B since it will ensure free movement of factors of production, competition and stimulate investment. Also, it allows control of country C since it produces cheaply compared with country A i.e. they might increase tariffs to make the good more costly thus competing fairly with the good X produced in the bloc. On the other hand, divert trade between trading bloc and country C since tariff imposed might not favour imports to the bloc (Solberg, 2006). Therefore, country C will venture into other markets. Question six: a. Intra-trade index for each product in respective countries Country A Good X Intra-trade index for Good X =1-  =1-  =0.55 Good Y Intra-trade index for Good Y=1-  =0.42 Good Z Intra-trade index for Good Z =1-  =0 Country B Good R Intra-trade index for Good R =1-  =1-  =0 Good S Intra-trade index for Good S=1-  =0.83 Good T Intra-trade index for Good T =1-  =0.74 Country C Good M Intra-trade index for Good R =1-  =1-  =0.73 Good N Intra-trade index for Good S=1-  =0.71 Good O Intra-trade index for Good T =1-  =0.81 b. Intra-trade index for total trade in the country Country A Country intra-trade index = Average index for the goods =  = = 0.31 Country B Country intra-trade index =  = = 0.52 Country C Country intra-trade index =  = = 0.75 c. Trade pattern explanation Grubel–Lloyd index measure is the theory behind explanation of the intra and inter-industry trade. The measure ranges from zero to one. The theory shows that there is existence of intra-industry trade and no inter-industry when the index is equal to one (Salvatore, 2001). On the other hand, there is existence of inter-industry trade and no existence of intra-industry trade when index is equal to zero (Solberg, 2006). Therefore, we can conclude the following from the trade in the following product and country index; Country A According to the calculation above, we can note that for; Good X there is intra-industry trade of index 0.45 (1-0.55) and inter-industry trade of index 0.55. Therefore, both forms of trade between industries exist. Good Y there is intra-industry trade of index 0.58 (1-0.42) and inter-industry trade of index 0.42. Therefore, both forms of trade between industries exist. Good Z there is no intra-industry trade while inter-industry trade exist since index is zero The total trade index between industries for Country A is 0.31 meaning that the country has high intra-industry trade of 0.69 and inter-industry trade of 0.31. Country B According to the calculation above, for; Good R there is no intra-industry trade while inter-industry trade exists since index is zero. Good S there is intra-industry trade of index 0.17 (1-0.83) and inter-industry trade of index 0.83. Therefore, both forms of trade between industries exist. Good T there is intra-industry trade of index 0.26 (1-0.74) and inter-industry trade of index 0.74. Therefore, both forms of trade between industries exist in the industry. The total trade index between industries for Country B is 0.52 meaning that the country has fairly balanced intra-industry trade of 0.48 and inter-industry trade of 0.52. Country C According to the calculation above, it can be noted that there exist intra-industry and inter-industry trade within the industry for all the products (Solberg, 2006). The proportion of the trade is as shown below; Good M there is intra-industry trade of index 0.27 (1-0.73) and inter-industry trade of index 0.73. Therefore, both forms of trade between industries exist. Good N there is intra-industry trade of index 0.29 (1-0.71) and inter-industry trade of index 0.71. Therefore, both forms of trade between industries exist in the industry. Good O there is intra-industry trade of index 0.19 (1-0.81) and inter-industry trade of index 0.81. Therefore, both forms of trade between industries exist in the industry. The total trade index within industries is at 0.75. Therefore, there is high inter-industry trade (0.75) in country C economy than intra-industry trade (0.25). Question seven Country ER-2009 ER-2014 R index Trade(X+M) Wi NEER (∑Rindex x Wi) Japan 77.76 98.04 0.793 66415 0.228 0.181 US 0.8114 0.8202 0.989 36261 0.124 0.123 UK 0.4872 0.5271 0.924 10054 0.034 0.031 NZ 1.2428 1.0462 1.188 14800 0.051 0.061 SG 1.1749 1.0836 1.084 18592 0.064 0.069 CHINA 5.5442 5.0859 1.090 141905 0.486 0.530 Hong Kong 6.2884 6.362 0.988 3829 0.013 0.013 Total 291,856 NEER =1.008 The Nominal Effective Exchange rate for Australia is 1.008. Therefore, Australian dollar has depreciated by 0.8% (Hartmann, 1998). Question Eight: Country CPI-2014 ER-2009 ER-2014 RER () Wi Rind() REER=∑WiRind Australia 110.5 Japan 102.8 77.76 98.04 105.383 0.228 1.36 0.309 US 108.6 0.8114 0.8202 0.835 0.124 1.029 0.128 UK 111.8 0.4872 0.5271 0.521 0.034 1.069 0.557 NZ 107.6 1.2428 1.0462 1.074 0.051 0.864 0.044 SG 113.3 1.1749 1.0836 1.057 0.064 0.90 0.058 CHINA 113.3 5.5442 5.0859 4.960 0.486 0.895 0.435 Hong Kong 119.4 6.2884 6.362 5.889 0.013 0.936 0.012 Total REER= 1.543 The real effective exchange rate is 1.543. Therefore, Australian dollar has appreciated by 54.3%. The appreciation of the currency shows that the exports have increased due to increased competitiveness of Australian exports in foreign market. On the other hand, imports might have decreased with exports held constant this is due to increased competitiveness of Australian products in the domestic market. These results to decrease in demand for foreign currency with increase demand of local currency. Therefore, results to increase in real effective exchange rate (Hartmann, 1998). Reference: Bhagwati, J. (1996). International trade. Cambridge, Mass.: MIT Press. China vs. E.U. vs U.S. vs. Japan: Population and GDP Comparison - Worldometers. (2016). Worldometers. Retrieved 11 August 2016, from http://www.worldometers.info/population/china-eu-usa-japan-comparison/ Hartmann, P. (1998). Currency competition and foreign exchange markets. Cambridge, U.K.: Cambridge University Press. Krugman, P. (1996). Rethinking international trade. Cambridge, Mass.: MIT Press. Krugman, P., & Obstfeld, M. (2000). International economics. Reading Mass.: Addison-Wesley. Mikić, M. (1998). International trade. New York: St. Martinʼs Press. Salvatore, D. (2001). International economics. New York: John Wiley. Shamah, S. (2003). A foreign exchange primer. Chichester, West Sussex, England: J. Wiley. Solberg, C. (2006). Relationship between exporters and their foreign sales and marketing intermediaries. 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