Tutorial Question Assignment Unit Code

Introduction

QUESTION 1

In the 19^th Century Britain was trading with countries from distant locations such as North America, Latin America, Africa and Asia. Today, Britain mostly trades with European countries. Examine the causes of the British changing trade pattern with reference to the Gravity Model.

SOLUTION 1

In the last few centuries there has been a positive growth in the world economy and moreover this growth has resulted in faster growth in the global trade.

Considering the data at country level, there is again a correlation between the economic growth and the trade. Countries which have a high GDP growth also have higher growth in terms of trade share. We could say that there has been a statistical correlation in the economic output and trade.

As per the Gravity Model of international trade, the international trade is highly influenced because of the size of the GDP. It is also influenced by the distance between the economic capitals of the subjects at study. The relative size of the GDP pulls the trade relations, however, higher distances weakens the trade relation (Stay and Kulkarni, 2016).

Consider the case of United Kingdom, Britain in the 19^th century. In this era, Britain had trade relationship with far off countries, which included Asian, African and other European countries. As free trade was allowed and possible during this period, Britain had a lot of colonies in these areas. Adding to this, there was availability of cheap raw material and in suffice quantities. This was true, even though the distance between the countries was high. However, in the recent past there has been a change of trade nature as most of such colonies are now independent. Moreover, there has been formation of European Union, because of which there is regulation of trade activities within the region as per the rules and regulations set by the said organization (Castillo et al., 2016).

Thus, change in pattern has been because of the reasons as under (Stay and Kulkarni, 2016):

• Alteration in the relative exchange rate
• Bilateral trade agreement
• Emerging economies in the Asian and African countries
• Change of comparative advantageous industry

QUESTION 2

How does the Ricardian model differ from the H-O theory in explaining international trade patterns among nations?

SOLUTION 2

In the Ricardian Model, there is focus on the comparative advantage. As per this model, the countries which specialize in production of goods and services can do the best. In this model, the primary assumption is that the factor of production is only one, which is, labour. As per this model, trade happens between the countries due to the differences in the labour productivity of the countries, which arises because of the technological difference in the countries. The model is applicable for short run. This is because the technology changes internationally as the time progresses (Jones, 2018).

H – O stands for Heckscher – Ohlin. Differentiating from Ricardian Model, H – O, lays emphasis on two factors of production which are labour and capital. A country is advantageous over the other because of the relative differences in the amounts of each of the factors. As per the model, the countries must produce as well as export the goods via the resources available in abundance. On the other hand, goods that are short in supply must be imported. There are differences in this model and the comparative advantage theory. The comparative advantage theory focuses on the competence of the process of production. As the country produces the goods they have in abundance, it would be easy and cheap to produce them. In a broad context, the capital intensive countries produce capital intensive goods and the countries which have high labour would product labour intensive goods. Such countries could trade with one another. As per the model, the labour and the capital can flow easily and freely between different sectors. Amount of the factors is what is different in both the countries. In this model, it is assumed that the long run countries are similar in technology. The H – O model suggest that there would be redistribution of wealth between the labour and capital owners (Etro, 2017).

Therefore, in the Ricardian model, difference in the technologies of the countries is taken care of and that everyone must be benefitted from the trade. However, H – O model, considers the differences in the endowment. As per H – O, there would be winners and losers of the trade. It also states the if we change the basis of the trade, we can change the outcome of the trade.

The main difference in H – O model is that in Ricardian, we assume different technologies. The wages determined according to this model are different according to the difference in the productivity of the countries. Therefore, we can conclude that this model is better than H – O for analysation of relations between developing and developed nations.

QUESTION 3

Trade need not be the result of comparative advantage but it can be a result of economies of scale. Discuss.

SOLUTION 3

Trade is a basic concept of economics. It is the concept wherein buying and selling of goods is involved, wherein there is a compensation paid by the buyer to the seller, or there is an exchange of goods between the two parties. Trade could take place in an economy between the producers and the consumers. International trade allows countries to expand their markets, for both, the goods as well as the services, which would not be possible otherwise. Therefore, because of the international trade, there is a higher competition in the market and thus, higher competitive pricing because of which customer has choices for having the cheaper product (Bartelme et al., 2018).

Why is there no open trading between the countries? This is because if there would be free trade, some countries would remain poor because of the other countries. Therefore, in such case the comparative advantage wont work as expected. There could be a lot of reasons for this, but the most important one is what is known as rent seeking. Such a situation arises if a group organized and petition their interest to the government and aim towards protecting it (Heakal, 2020).

There is exploitation of country’s comparative advantage which means trade encourage a country to specialize in producing goods and services which the country can product easily, effectively and efficiently and also at the lowest cost.

Producing a restricted range of goods and services for the domestic and export market would mean that the country is capable of producing it in higher volumes. This would further prove to be cost beneficial with regards to the economies of the scale.

Because of trade, competition increases and the prices lower because of which consumers are benefitted. This is because consumer is able to raise the purchasing power of their income and this leads to a situation known as consumer surplus.

For high value added products, MNCs split the production process globally. An example for this is Apple. Apple designs their computers in the U.S., however production contract is given to the Asian countries. Because of trade it is possible for a company to have multiple country sources. For car production, the process is even more globalised. This is because production of various spare parts like engines, tyres, designing etc.

QUESTION 4

Explain the effects of migration of labour between two nations. Use the figure below and the marginal product of labour concept to explain your answer.

SOLUTION 4

Considering the general view, migration of labour in the market depends primarily on the skill set of the migrant labour and the key characteristics of the economy to which they migrate. They could also change between the runs (short and long), in case the economy and the labour demands could adjust for the increment in the supply of labour. Migration of labour could affect the supply of labour because there is an increase in the worker pool in particular economy sectors. Moreover, at the same time, migration could probably tend to increase the labour demand since migrants would expand the consumer demand for said certain goods and services. In other words, it is expected that there is a stiff competition for existing jobs in certain sectors, however, new jobs shall also be created.

In the figure given, the marginal product of the labour in the country are V and M. At the starting, the marginal product of the labour for country Y and the marginal product of the labour for the country M intersect at a point E. This point is termed as equilibrium point. Then the equilibrium wages, that is, We is found and also equilibrium labour (Le) is also found.

Consider that the wages increase from We to Wy, then the marginal product of labour for country M is not labour, however, the marginal product of the labour for country Y increases its labout from Le to L1. The migration of labour increases the wages and then migrates it from a country to another.

In the figure the marginal product of the labour between two nations, that is, country M and country Y. The vertical line describes the wages, however, the horizontal line shows the labour. Also, in the said diagram, Marginal Product of Labour for country M intersects with Marginal Product of Labour for country Y, this helps to determines the equilibrium wages and the labour. It is seen that the labour and wages are in inverse proportion for one country to other. If wages increase for Marginal Product for Labour Country Y, labour increases and if the wages decrease for Marginal Product for Labour for country M, labour increases.

QUESTION 5

Infant Industry protection is a key solution for the growth of industrialization of developing countries. Discuss your answer by using the graph below and any other graph(s) that you can deem appropriate.

SOLUTION 5

As per the infant industry theory, new industries in the developing nations would need protection against the competition until the industry is mature enough. This theory can into force in the early 19^th century and was incorporated by Alexander Hamilton and Friedrich List. Their justification was that the policy would act as a protectionist for the trade policy. To implement this, the governments in the developing countries could introduce measures like import duties, tariffs on products, allocate a specific quota, control the exchange rate to provide enough room for their infant industry to prosper, develop and stabilise in the market.

The infant industry contention is an economic rationale for exchange protectionism. The newborn child industry hypothesis expresses that new enterprises in creating nations need security against serious weights until they develop and create economies of scale which can equal their rivals’. The center of the contention is that beginning enterprises frequently don’t have the economies of scale that their more seasoned rivals from different nations may have, and in this manner should be secured until they can accomplish comparable economies of scale (Ravikumar et al., 2018). Building up country’s legislatures may institute estimates, for example, import obligations, levies, amounts, and swapping scale controls to give the newborn child industry Time to create and balance out. Graph demonstrating how transitory tax assurance can empower firm to grow and get lower midpoints costs (where it will no longer need tax security). As we probably am aware protectionism could be advocated for an economy attempting to grow new assembling ventures, baby industry contention expresses that creating nations are defended to put duties on imports on the off chance that they are trying to grow new businesses and enhance their economy. Specifically, so there is an avocation for putting taxes on businesses where a nation has an inert similar bit of leeway. It implies in the event that they can create foundation and economies of scale – they will have a similar preferred position.

QUESTION 6

After the Seattle 1999 World Trade Organization Ministerial Conference fiasco, in the next 2 years, large anti-globalization demonstrations rocked the International Monetary Fund and Work Bank in Washington. What was the anti-globalization movement goal- and was it right? Explain you answer.

SOLUTION 6

The objective of the development was to confine the plan of extension of progression drive and streamlined commerce that were covered up in changes programs, dispatched by IMF and World Bank. In addition, these drives for globalization, opening up of the economies and multi-parallel economic accords for the sake of globalization were likewise harming the earth and manageability. In this way, the another objective was the security and preservation of condition (Smith, 2014).

The development was straight up to as far as possible, since IMF and World Bank utilized monetary help and backing as instruments the power the countries and their economies to open up for the created nations. At whatever point a nation (explicitly creating or immature) went after help, at that point these organizations constrained at that point to execute the projects that were focussed upon tough monetary strategies, less spending on advancement projects and stir more to open up various divisions (Warner, 2005). It expanded abuse, debasement and financial lease while homegrown enterprises endured.

However, these developments were needed to be introduced to their own administration with the goal that the administration takes a shot at creating administrative structure, actualize hazard the executives, revelations and administrative arrangements in the nation. It will assist nations with getting skillful in certain years and take the advantages of deregulation as against globalization isn’t an answer in the long haul. Along these lines, the development should be constrictive and make their own legislatures to work toward a path that will have the option to make them more serious, rather depending upon IMF and WB plans.

The goal of the improvement was to restrict the arrangement of the augmentation of headway drive and liberation that were concealed in changes programs, dispatched by IMF and World Bank.

Moreover, these drives for globalization, opening up of the economies and multi-even financial collusion for globalization were similarly hurting nature and sensibility. Thusly, another goal was the security and assurance of the condition.

The improvement was straight up to quite far since the IMF and World Bank used budgetary assistance and sponsorship as mechanical assemblies the force the nations and their economies to open up for the made countries.

At whatever point a country (unequivocally making or juvenile) followed help, by then, these associations obliged by then to complete the undertakings that were focussed upon unbending financial systems, less spending on progress activities, and work more to open up different parts. It extended abuse, pollution, and money related rent while local endeavors persevered.

Nonetheless, these improvements were should have been acquainted with their own legislature so the administration manages making authoritative frameworks, execute unsafe the chiefs, presentations, and regulatory courses of action in the country.

It will help countries with getting prepared in specific years and take the upsides of smoothed out trade as against globalization isn’t an answer eventually (Kelsey, 2008).

Along these lines, the improvement ought to be constrictive and make their own administrations moving in the direction of a way that will have the alternative to make them more genuine, rather relying on IMF and WB plans.

REFERENCES

Bartelme, D., Costinot, A., Donaldson, D. and Rodriguez-Clare, A. (2018) ‘External economies of scale and industrial policy: A view from trade’. UC Berkeley July. pp. 1-43.

Castillo, J.S., Villanueva, E.C. and García‐Cortijo, M.C. (2016) ‘The international wine trade and its new export dynamics (1988–2012): A gravity model approach.’. Agribusiness. 32(4) March. p. 01. John Wiley & Sons.

Etro, F. (2017) ‘The Heckscher–Ohlin model with monopolistic competition and general preferences’. Economics Letters. 158. pp. 26-29.

Heakal, R. (2020) The Investor’s Guide to Global Trade [Online] Available at: https://www.investopedia.com/insights/what-is-international-trade/ [Accessed: 26 September 2020].

Jones, R.W. (2018) ‘Part I: An Old Favorite: The Ricardian Model’. In Jones, R.W. International Trade Theory and Competitive Models. New York: World Scientific.

Kelsey, J. (2008) Serving Whose Interests?: The Political Economy of Trade in Service Agreements. New York: Taylor and Francis.

Ravikumar, B., Riezman, R. and Zhang, Y. (2018) Optimal Infant Industry Protection. 2018 Meeting Papers: Society for Economic Dynamics. pp. 1-36.

Smith, N. (2014) The Dark Side of Globalization: Why Seattle’s 1999 Protesters Were Right [Online] Available at: https://www.theatlantic.com/business/archive/2014/01/the-dark-side-of-globalization-why-seattles-1999-protesters-were-right/282831/ [Accessed: 26 September 2020].

Stay, K. and Kulkarni, K.G. (2016) ‘The gravity model of international trade, a case study: the United Kingdom and her trading partners’. Amity Global Business Review. 11. pp. 28-39.

Warner, A. (2005) ‘A Brief History Of The Anti-Globalization Movement’. 12 U. Miami Int’l & Comp. L. Rev. 12(2). pp. 237-268.