International Economics: Absolute and Comparative Advantage, NAFTA, Singapore's Economic Strategies, Balance of Payment and Currency Strength

This article discusses the concepts of absolute and comparative advantage, the impact of NAFTA on Mexico and the US, Singapore's economic strategies, and the balance of payment and currency strength of Singapore.

Running head: INTERNATIONAL ECONOMICS
International Economics
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Table of Contents
Question 1........................................................................................................................................2
Question a....................................................................................................................................2
Question b....................................................................................................................................2
Question c....................................................................................................................................3
Question 2........................................................................................................................................3
Question a....................................................................................................................................3
Question b....................................................................................................................................5
Question c....................................................................................................................................6
Question 3........................................................................................................................................7
Question a....................................................................................................................................7
Question b....................................................................................................................................7
Question 4........................................................................................................................................8
Question a....................................................................................................................................8
Question b....................................................................................................................................9
References......................................................................................................................................10

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Question 1
Question a
Given the information in table 1, it is observed that US can produce 5 bottles of per unit
of labor hour while UK using the same labor hour can produce 15 bottles of wine. As UK can
produce more bottles of wine using the same labor hour, UK has an absolute advantage in wine
production. Using 1hour of labor US is able to produce 20 yards of cloth. US produces 10 yards
of cloth using the same labor. US thus possesses an absolute advantage in production of cloth.
Following the Adam Smith’s principle of absolute advantage, US should specialize and export
cloth while UK should engage in specialization of wine and export wine. As the nation produces
following their specialization skill, more wine and cloths will be available after trade, which
increases welfare of both the nation.
Question b
The Ricardo’s model of comparative advantage suggest that a nation should specialize
and export goods with a lower opportunity cost relative to others. The primary assumption of
Ricardian model include perfect competition, two nations, two commodities and only one factor
input (Feenstra, 2015).
Following table 2, US enjoys an absolute advantage in both wine and cloth. The proposed
‘Absolute Advantage’ theory of Adam Smith here fails to explain trade direction. Pattern of trade
here needs to be explained using the theory of comparative advantage proposed by David
Ricardo.

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Opportunity
Cost Output per labor hour
Nation Wine Cloth
US 40/40 = 1 40/40 = 1
UK 10/20 = 0.5 20/10 = 2
Opportunity cost of wine in UK is lower relative to US. UK therefore has a comparative
advantage in wine. US on the other hand has a lower opportunity cost for cloth. The comparative
advantage of US is thus in production of cloth. As per the Ricardo’s principle of comparative
advantage, UK then should specialize in wine while US should specialize in cloth.
Question c
In Hecksher- Ohlin model, comparative advantage is defined in terms of relative factor
abundance. Countries are separated in terms of their relative factor abundance. Industries are also
segregated in terms of relative factor intensity. A country enjoys a comparative advantage in
producing a commodity when the required factor is abundant in the country and a comparative
disadvantage in goods for which the required factor is available in insufficient quantity.
Question 2
Question a
Before NAFTA
Consumer surplus= 1
2 × 80× ( 14−6 )
¿ 1
2 ×80 × 8

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¿ 320
Producer Surplus= 1
2 × 40 × ( 6−2 )
¿ 1
2 × 40× 4
¿ 80
Tariff Revenue= ( 6−3 ) × ( 80−40 )
¿ 3 × 40
¿ 120
Deadweight loss= 1
2 × ( 40−10 ) × ( 6−3 ) + 1
2 × ( 40−10 ) × ( 6−3 )
¿ 1
2 ×30 ×3+ 1
2 × 30× 3
¿ 45+ 45
¿ 90
Total surplus=320+80+120−90
¿ 520−90
¿ 430
After NAFTA
Mexico faces a lower world price at 3. At the lower price demand of consumers increase
from 80 to 110. The consumer surplus is obtained as

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CS=1
2 × 110× ( 14−3 )
¿ 1
2 ×110 ×11
¿ 605
The lower price reduces domestic production from 40 to 10 pocket calculator. The
surplus to domestic producers following NAFTA agreement is
PS=1
2 × ( 3−2 ) ×10
¿ 1
2 ×1 ×10
¿ 5
Total Surplus=605+ 5
¿ 610
The total surplus to Mexico thus increases after becoming the member of NAFTA.
Question b

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Figure 2: Impact of tariff on a large nation like US
After tariff domestic price of imported good increases. This lowers the consumer surplus
by the area enclosed by A, B, C and D. Domestic producers on the other hand are benefitted
from the higher price as shown by the increased surplus to producers by A. Government earns a
tariff revenue of the amount C + G. Deadweight loss is the area B + D. Net surplus is the area G
– (B + D). Whenever tariff revenue exceeds that of the deadweight weight loss, net welfare
increase. A large nation thus benefitted from tariff by imposing small tariff. This is how US can
benefit from tariff imposition under the same NAFTA.
Question c
NAFTA was not proved politically successful in boosting economic growth of Mexico
and enable US to compete with emerging country like China. NAFTA however failed to make
any significant impact on the economy of US. At that time, GDP of America was almost 20

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times greater than that of Mexico. The imposed US tariff on Mexican goods and services
averaged as low as 2 percent. It was thus the biggest dividend for US in terms of foreign policy
(Caliendo & Parro, 2015). The decentralization and economic competition associated with
NAFTA increased political competition in Mexico and did nothing impactful for US.
Question 3
Question a
After separation from Federation of Malaysia, the government of Singapore has made
two important strategic decision – one was the transition from import substitution
industrialization to export led industrialization. The other one was to take strategy to attract
foreign investment. The export led industrial strategy helped the nation to broaden the industrial
base of the nation as reflected from the growing share of industry in GDP. In 1975, the share of
manufacturing in GDP increased to 22 percent from earlier 14 percent (Clarete & Tuano, 2015).
The export led industrial strategy not only increased share of industries in GDP but also helped
the nation to maintain full employment in the economy. Later, Singapore moved up the value
chain from labor intensive to capital high-end capital-intensive one, which added to further
growth of Singapore.
Question b
Allowing free trade in goods and services and establishment of economic integration was
one of the primary objective of ASEAN community. In establishing economic integration, one
fundamental aspect was trade in services. The initiative towards free trade started in the year
1955 through an agreement called ASEAN framework agreement on service (AFAS). ASEAN
started the initiatives to open up nations through agreement named ASEAN Free Trade Area

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(AFTA). The ministers of ASEAN nations agreed to follow the move of AFTA. As per the
agreement Brunei, Indonesia, Philippines, Malaysia, Thailand and Singapore were to implement
the free trade policy by 2002. The less develop nation took a relatively greater time and promised
to remove all the trade barriers by 2006 to 2008.
Singapore being a member of ASEAN had to comply with ASEAN Free Trade area by
the year 2008. However, in 1995 the target date accelerated to 2003. Singapore imposed
Common Effective Preferential Tariff as one core implementation of AFTA for three years.
Singapore holds the membership of Asia pacific economic cooperation. The WTO’s obligation
regarding trade related issues was come into force in 2000 (Hoang & Sicurelli, 2017). Singapore
in the year 1995 joined government procurement agreement and revised negotiation of bilateral
treaties with different nations. The open and non-discriminating regime of trade in Singapore
benefitted its trading partners by giving them free access to Singapore market.
Question 4
Question a
The two primary accounts of balance of payment are current account, capital, and
financial account. Export and import belong to the current account of BOP. Export of goods and
services for Singapore increased to 188,908.4 million in Quarter 2 compared to 184, 785. 5
million in the previous period. Import of goods and services also increased in Quarter 2
compared to the previous quarter. However, as import is lower than export the trade balance is
positive. Overall, the current account balance in Singapore for Quarter 2 stands at 21049.5
million, which is higher than previous period balance of 20092. 9 million indicating a 1 %

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change in current account balance. The balance in capital and financial account is 16,744.3
million, lower than the previous period. The overall balance of payment in Quarter 2 is estimated
to be 4443.2 million.
Question b
Several factors explain strength of Singapore dollar. Singapore has maintained a
relatively low and stable rate of inflation. The stable inflation allowed the currency to increase.
Low interest rate is another factor responsible for strong Singapore dollars (Bahmani-Oskooee &
Harvey, 2017). The low level of deficit along with a low public debt the Singapore currency
remained strong.

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References
Bahmani-Oskooee, M., & Harvey, H. (2017). The Asymmetric Effects of Exchange Rate
Changes on the Trade Balance of Singapore. Global Economy Journal, 17(4).
Caliendo, L., & Parro, F. (2015). Estimates of the Trade and Welfare Effects of NAFTA. The
Review of Economic Studies, 82(1), 1-44.
Clarete, R. L., & Tuano, P. A. O. (2015). Goods trade liberalization under the ASEAN Economic
Community: effects on the Philippine economy. Philippine Review of Economics, 52(2),
210-233.
Feenstra, R. C. (2015). Advanced international trade: theory and evidence. Princeton university
press.
Hoang, H. H., & Sicurelli, D. (2017). The EU’s preferential trade agreements with Singapore and
Vietnam. Market vs. normative imperatives. Contemporary Politics, 23(4), 369-387.