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Student Number: (enter on the line below)
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HI5016
INTERNATIONAL TRADE AND ENTERPRISE
FINAL ASSESSMENT
TRIMESTER T1, 2021
Assessment Weight: 50 total marks
Instructions:
 All questions must be answered by using the answer boxes provided in this paper.
 Completed answers must be submitted to Blackboard by the published due date
and time.
Submission instructions are at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of
knowledge of the key topics covered in this unit
HI5016 Final Assessment T1 2021

Question 1
( 7 marks)
The Gravity Model
1. "The gravity model of international trade is able to predict trade
flows between two countries based on two principal factors."
Describe the gravity model – specify the variables, use an example of Canada and
the USA, or Mexico and the USA – both situations where the gravity model is
accurate.
ANSWER: ** Answer box will enlarge as you type
The gravity model of International Trade in International Economy, based on the economic
dimension and distance between two sides, is a model that, in its original form, foresees bilateral
trade flows. Research demonstrates that "overwhelming evidence exists that commerce tends to
drift away. The gravity model of international trade provides that two nations' trade volumes are
directly linked to their GDPs in size and reversely linked to their geographical distance. The
fundamental principle behind the international trade gravity model is pretty straightforward.
Large economies with geographical proximity to one other tend to have larger levels of
commerce. The GDP of Country I, Country J and distance between two nations is utilized as a
gravity model to determine the international trade volume of the two nations (Kulkarni & Stay,
2016, p, 5, paragraph 2).
The Gravity Model states that the interaction between two sites may be calculated by the
population of these two sites, divided by the distance between them. This model's main
assumption is that the distance not only determines the interaction of two cities (Klimczak, 2014,
p, 5, paragraph 3).
Let us take the example of the USA and Canada
Canada and the United States are the largest trading partners, and the amount of commerce
between these two nations is the highest in the world. In 1999, Canada purchased C$215 billion
of US goods, representing about 2/3 of the total Canadian imports of goods and 23% of the
entire US goods export. In the same year, a good worth C$286 billion was shipped to the U.S. by
Canada, representing 87% of the overall exports of Canadian goods and 19% of the total imports
of the U.S. In general, the U.S. deals with Canada as much as it does with all 15 European Union
nations combined, and its commerce with Ontario alone eclipses its business with Japan. This
volume of commerce is perhaps not surprising given the fact that both countries share numerous
economic and cultural similarities, that nearly 90% of the Canadian population lives within 100
miles (161 km) of the US border and that Canada's border with the 48 contiguous countries
covers nearly 4,000 miles (over 6400 km). In addition, the trend towards freer bilateral trade,
which was completed by the 1988 Free Trade Agreement between Canada and the United States,
was nearly continuously widened and enlarged by the North American Free Trade Treaty,
beginning with the 1965 Automotive Pact (NAFTA) (Kalirajan, 2008, p, 5, paragraph 1).
Question 2
(7 marks)
Absolute and Comparative Advantage
HI5016 Final Assessment T1 2021

2. Assume a world of two nations USA and Australia. The two nations produce
machinery and agriculture. The USA can produce 160 units of machinery or 200
units of agriculture while Australia can produce 140 units of machinery or 50
units of agriculture, in the same time period.
a. Define "absolute advantage" (1 mark)
b. Which country, Australia or USA, has an absolute advantage in the
production of agriculture and machinery? Explain the basis for your answer (3
marks)
c. Which country – Australia or USA - has a comparative advantage in
production of machinery and agriculture? Define comparative advantage and
explain how it applies in this example. (3 marks)
ANSWER:
Absolute advantage is a term used in economics to describe a party's greater manufacturing
capabilities. It refers to a company's capacity to manufacture a product or service at a cheaper
cost (i.e., more efficiently) than a competitor (Seretis & Tsaliki, 2016, p, 1, paragraph, 1) .
The USA has an absolute advantage over Australia in the production of agriculture and
machinery. The USA produces 20 units of machinery and 150 units of agriculture more than
Australia in the same amount of time. The US boasts some of the world's richest croplands that
facilitate corn and wheat production. In exporting capital goods, chemicals, diverse commodities,
plastics, rubber and transport, the United States has a demonstrated competitive advantage.
Therefore, the USA has the absolute advantage.
The capacity of an economy to produce a certain item or service at a lower opportunity cost than
its trade counterparts is known as comparative advantage. Comparative advantage allows a
corporation to sell goods and services at a cheaper cost than its competitors while maintaining
higher profit margins (Smith et al., 2013, p, 1, paragraph, 1 ). The USA has the comparative
advantage as they can produce more units of agriculture and machinery in equal time compared
to Australia. The USA has a comparative edge of equipment and farming production in contrast
with Australia. Comparative advantage is believed to be the capacity to produce an item or
service for a lesser chance than its rivals. It also allows enterprises to provide goods and services
at prices cheaper than their competitors and therefore generates wider margins for profit and
sales.
Question 3
(7 marks)
The Standard Model
The Standard Model of Trade is a general model that accommodates other
models which reference specific sources of comparative advantage, e.g.
Ricardian model (differences in labour effectiveness) and Heckscher–
Ohlin model (references' factors of production').
There are four key relationships upon which the Standard Model is based.
Please list each of the four relationships and give one example for each.
HI5016 Final Assessment T1 2021

ANSWER:
The standard trade model is a broad model that considers Ricardian, particular factors and
Heckscher-Ohlin models. The cases might be cases Food (F) and fabric ( C), and PPF is a
smooth curve. Variances across nations in employment services, labour capacity, physical
capital, land, and technology lead to differences in production options. The PPF determines
the relative delivery function of a country (Bel & Rosell, 2016, p, 1, paragraph, 2).
The following are the key relationships upon which the standard model is based:
1. The relationship between the production possibility frontier and the relative supply
curve: The extent to which an economy manufactures its production capability relies on
the price of cloth for food. A market economy will pick production levels that PC/P at
certain market prices (Bryceson & Ross, 2020, p, 2, paragraph, 1). The assumption of this
model is as follows:
-each country produces two commodities, cloth(C) and food(f)
-each country's production possibility frontier is a smooth curve
2. the relationship between relative prices and relative demand: Several events might
warrant this notion. On the one hand, everyone tastes the same, and all the resources
are the same. Another thing is that the government redistributes income such that its
vision of social welfare as a whole is maximized. In essence, the premise demands that
the impact on demand not be too large from the shifting income distribution.
3. The determination of world equilibrium by world relative supply and world relative
demand: If the country were the first food exporter, the direction of this influence would
be reversed. An increase would lower the country and make it worse: its exports would
reduce the items' relative price. For example, if the Pc/Pf ratio increases, a country that
exports originally will be better off.
4. The effect of the terms of trade—the price of a country's exports divided by the price of
its imports—on a nation's welfare: The price of a good export from a country divided
firstly by the price of the product it imports. A trade growth raises the wellbeing of a
country, whereas a trade fall diminishes its wellbeing.
Question 4
(7marks)
Controversies in Trade Policy
HI5016 Final Assessment T1 2021

After the Seattle 1999 World Trade Organization (WTO) Ministerial Conference,
in the next two years, large anti-globalization demonstrations rocked the
International Monetary Fund and World Bank in Washington.
Describe the role of WTO with respect to the following 7 aspects: knowledge of
WTO/GATT, fostering trade liberalization, abolishing tariffs, increasing transparency,
seeking resolutions, improving communication within trading blocs, controlling
export subsidies, improving national welfare and competitiveness of developing
countries (1 mark each)
ANSWER:
The WTO is the sole international agency to deal with global trade regulations. Its major duty
is to ensure the smooth, predictable and unfettered flow of business .
The role of WTO concerning the following seven aspects are as follows:
Knowledge of WTO/GTTA: the major role WTO focuses on is delivering the knowledge of WTO
and GTTA. Its main function is that information flows as smoothly, predictable and free as
possible. This works for the people, and they want people to have lots of information.
Fostering trade liberalization: WTO focuses on fostering trade liberalization. Keeping the focus
on trade liberalization helps expand market access by converting and binding, and eliminating
all non-tariff obstacles into tariffs (tariffs), reducing domestic subsidies or assistance that
distort trade and reducing export subsidized volumes and expenses(C. Iloh et al., 2020, p, 5,
paragraph, 2).
Abolishing tariffs: The WTO focuses on abolishing tariffs because fewer products are charged
at high rates. The World Trade Organization is sometimes referred to as an organization of free
trade. Tariffs and other types of protection are permitted under the system. More precisely, it
is a set of rules for competition that is open, fair and unfair.
Increasing transparency: In the WTO Glossary, transparency is described as "the extent of the
openness and predictability of trade policies and procedures and how they are developed."
The broad principles of openness set out in Article X of the General Agreement on Tariffs and
Trade have fostered transparency (GATT) (Marceau & Hurley, 2012, p, 1, paragraph, 1). WTO
promotes transparency.
Seeking resolutions: The World Trade Organization is holding trade negotiations (WTO). It
helps to resolve commercial disagreements. If other WTO members break trade limitations, a
multilateral dispute settlement mechanism will be used in nations.
Improving communication within trading blocks: Countries bring issues to the World Trade
Organization (WTO) to improve communication and settle disagreements. The matter will be
handled through multilateral dispute resolution and increased communication if they believe
their rights under the agreements have been violated
Controlling export subsidies: A subsidy for exports lowers the price that international
customers must pay. Domestic customers, as a result, pay a greater price than overseas
clients. Most subsidies directly tied to the export volume are prohibited by the World Trade
Organization (WTO). To increase commodity exports, a country's government provides
incentives to exporters.
Improving national welfare and competitiveness of developing countries: Special provisions
for developing nations are included in all WTO accords. It includes initiatives to improve rising
nations' trading prospects. It also includes steps to boost emerging nations' trading potential.
Question 5 (11 marks)
HI5016 Final Assessment T1 2021

Instruments of Trade Policy
i. Evaluate the effects of an import tariff by the government of a small country.
Explain in detail the effects of an import tariff on the economic welfare of the small
country. (6 marks)
ii. Describe the potential advantages to
the economy if the government offers an
export subsidy (5 marks)
ANSWER:
The small country assumption implies that the country's imports account for such a small
portion of the global market that even a total ban on imports would have no discernible
influence on global demand for the product, and hence would have no influence on global
pricing. As a result, when a tiny country imposes a tariff, it has little influence on global prices.
The premise of a tiny nation means that the export supply curve is horizontal at the world
price level (Alfaro & Warzynski, 2020). The world price is seen as exogenous by the tiny
importing country since it does not influence it. The exporter is prepared to deliver as much
product as the importer desires at the specified global price. Imported items are more
expensive as a result of tariffs. Domestic producers are not compelled to lower their prices
due to increasing competition, and domestic consumers pay higher prices as a result. When a
small country imposes a specific tariff, the domestic price rises by the whole value of the duty.
When a tariff is imposed on imports, two requirements must be met for the ultimate
equilibrium to be reached—the same two criteria must be met when a major country is
involved.
As a result of the tariff, consumers of the goods in the importing country are worse off.
Consumer surplus in the market is reduced when the domestic price of both imported items
and domestic equivalents rises as a result of the tariff, producers in the importing country
benefit (Corchón Diaz & Torregrosa, 2018, , p, 3, paragraph, 1). The increase in the price of
their goods raises the industry's producer surplus. Price rises also result in a rise in existing
business output (and maybe the addition of new enterprises), a rise in employment, and a
rise in profit, payments to fixed expenses, or both. The government receives tariff revenue as
a result of the tariff. The revenue's beneficiaries are determined by how the government
spends it. Because these monies support various government expenditure initiatives,
HI5016 Final Assessment T1 2021

someone in the country will most certainly profit from them. Summing the benefits and losses
to consumers, producers, and the government yields the country's aggregate welfare impact.
A negative production efficiency loss (B) and a negative consumption efficiency loss (C) make
up the net impact (D). The two losses are commonly referred to as "deadweight losses" when
taken combined. Because the national welfare change is entirely negative, the tariff's net
national welfare effect must be negative. This implies that a tariff imposed by a small
importing country must hurt national wellbeing.
Government subsidies assist industry by covering a portion of the cost of producing an item or
service through tax credits or reimbursements or covering a portion of the cost a customer
would pay to buy an item or service. The advantages of export subsidies over import tariffs in
terms of increasing productivity are threefold: (1) by promoting exports, a country ensures
that firms are subject to the "discipline of the international market," which forces firms to
become more productive; (2) by subsidizing only exporting firms, a country effectively limits
the subsidy to firms with high productivity; and (3) by subsidizing only exporting firms, a
country effectively limits the subsidy to firms with high productivity.
Question 6
(11 marks)
Different market structures
Assume you are graduating from Holmes Institute and that you want to begin a
business in Australia. You are aware that there are four different market
structures and that some structures are hostile to new products and services.
You decide upon Australia as a location for an Asian fast-food theme restaurant
because you have expertise in that sector and you believe that it will be popular. You
have also considered the four market structures: perfect, monopolistic, oligopoly and
monopoly competition. You decide on one of the structures.
a. D
escribe each of the four market structures and explain how each one may be conducive
to starting your new Asian themed small business. (8 marks)
b. S
uppose you start your business within a monopolistic market structure. How is that
structure advantageous to your proposed business and how would it affect the future
growth of your business? (3 mark)
HI5016 Final Assessment T1 2021

ANSWER:
A.
The different market structure shapes and characterizes the economy.
1. Perfect competition
A market system in which many small businesses compete against each other is known as perfect
competition. A single corporation does not have substantial market influence in this circumstance
(Thampapillai, 2010, p, 2, paragraph, 2). The concept of perfect competition is based on many
assumptions: (1) all companies seek to maximize profits; (2) all businesses seek to maximize
profits; and (3) all businesses seek to maximize profits. In addition, (2) There is no restriction on
entering or exiting the market; (3) all enterprises offer identical (i.e., homogeneous) items; and
(4) there are no customer preferences.
The perfect competition market structure is well suited for opening a new Asian themed business
as it allows easy entry and exit points from the business (no restrictions), but all the assumptions
of the perfect competition do not relate to real-life as customers tend to have diverse
preferences also.
2. Monopolistic Competition
Monopolistic competition is a market system in which a large number of tiny businesses compete
against one another. In monopolistic competition, corporations sell items that are identical yet
somewhat different (Etro, 2019). This provides them with some market power, allowing them to
charge higher prices within a given price range. Monopolistic competition is based on the
following assumptions: (1) all businesses maximize profits; (2) market entrance and departure are
free; (3) companies provide distinct products, and (4) customers may prefer one product over the
other.
Monopolistic business can also be successful for an Asain themed business in Australia because
there are not many Asian themed businesses present, which allows competition to produce and
deliver the best product and services that attract more customers and is beneficial for the smaller
and larger similar type of businesses.
3. Oligopoly
A market structure controlled by a limited number of enterprises is referred to as an oligopoly. As
a result, there is little competition. Instead, the companies can either compete against one
another or work together. They can then utilize their combined market power to raise prices and
increase profits. The following assumptions support the oligopolistic market structure: (1) all
businesses maximize profits, (2) oligopolies can set prices, (3) market obstacles to entrance and
exit exist, (4) goods can be homogeneous or differentiated, and (5) just a few businesses
dominate the market.
Initiating an Asian themed business in an Oligopolic environment often harms and affects the
business of the smaller business as the customers. The trade market is directly controlled by the
groups of the bigger business that attract all the customers.
4. Monopoly
A monopoly is a market arrangement in which one company dominates the whole market.
Because customers have no other options, the corporation has the most market power in this
case. As a result, monopolies frequently limit output to raise prices and boost profits. Monopoly
markets follow the assumptions of (1) The monopolist optimizes profit, (2) it has pricing control,
(3) there are substantial entrance and exit barriers, and (4) the market is dominated by just one
business.
In a monopoly business, no other small businesses can survive or make a decent profit due to the
large company having big power over the pricing, service and is dominated by the one business.
HI5016 Final Assessment T1 2021

B.
Monopolistic market structure often favours smaller businesses that can provide differentiated
products that provide them with a certain degree of power to change the market pricing
according to their favour to a higher price range for a similar product. A monopolistic market is
good for the initial profit and stability of the business, but it affects the long term goals and
future growth of the business because the bigger businesses have more power and can influence
the market prices in the long run. In the Asian themed business in Australia, the business can
initially make good profits in the local community due to its new availability, but the better
quality and services provided by other business might overshadow the Asian theme idea and
products in the future.
HI5016 Final Assessment T1 2021

References
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<https://www.researchgate.net/publication/342927177_Export_Conditions_in_Small_Coun
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Competition and Costs. Journal of Policy Analysis and Management, 35 (3), pp.533–558.
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END OF FINAL ASSESSMENT
HI5016 Final Assessment T1 2021

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HI5016 Final Assessment T1 2021