Desklib - Online Library for Study Material with Solved Assignments, Essays, Dissertations

Student Number: (enter on the line below)
Student Name: (enter on the line below)
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