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Question 1(a)

Introduction

Explain theory of comparative advantage


- being able to produce the good at a lower opportunity cost than another country
How the law of comparative advantage can benefit countries
- if they specialise in the goods in which they have a comparative advantage in the
production of those goods
- and this could be case between USA and Vietnam
Exemplify using Computer v Textile production for each country

Body

Production before specialisation and total world output


- due t o different factor endowment and labour productivity
- devotes half of their resources to producing each good
Computer
USA
Vietnam
Total

Textile
40

10

10

45

20

Opportunity cost ratios


1 unit of computer

1 unit of textile

USA

1C=0.25T

1T=4C

Vietnam

1C=1T

1T=1C

- for USA, produce 4 units go computer for 1 unit of textile


- opportunity cost of 1 computer is 0.25 units of textile
- opportunity cost of producing 1 unit of textile is 0.5 unit of computer
- USA has a comparative advantage in computer production since it needs to give up
lesser textile than Vietnam

Production after complete specialisation and total world output


Computer
USA
Vietnam
Total world output

Textile
80

20

80

20

Terms of trade
- measures the rate of exchange of one good or service
- countries will agree to trade if the terms of trade lie between 1C < 1 Textile < 4C or
0.25T < 1C < 1T

Consumption after specialisation


-assume trade arises at TOT of 1T=1C
-trading 10T for 10C
Computer

Textile

USA

70

10

Vietnam

10

10

Conclusion
- USA consumes 70 units of computers and 10 units of textiles, gaining 30 units of
computer compared to before trade
- Vietnam consumes 10 units of both goods, gaining 5 units of computer
- both countries are able to consume more than before - higher SOL

Question 1(b)
Introduction

Define the trade agreement established


-free trade (??)
Impact on economies on USA and Vietnam

Body
Thesis: Benefits

Higher standard of living (doesnt really impact economy)


-gains from trade in terms of higher consumption level
-wider consumer choice and greater variety

Trade as an engine of growth


-increase demand for exports
-lower prices of exports

Innovation and transfer of technology + increase FDI

Improvement in BOP
-current account

Increase competition and prevention of monopolies

Efficiency in production and lower world prices

Factor price equalisation

Anti-thesis: Costs

Unfair competition and Dumping


- dumping refers to the selling of the same good to a foreign country at a lower price than

that charged to the domestic buyers and often below the marginal cost of production

Over-reliance on Foreign countries


-susceptible to externally induced cyclical unemployment
-susceptible to imported inflation
-structural unemployment

Worsening BOP
Developing vs Developed country

Widening income disparities

Conclusion

Costs of free trade can be mitigated through appropriate government measures and
policies