College of Administrative and Financial Sciences

Assignment- 1
Deadline: 24/2/2020 @ 23:59

Course Name: Macroeconomics Student’s Name:

Course Code: ECON201 Student’s ID Number:
Semester: II CRN: 20413
Academic Year: 1440/1441 H

For Instructor’s Use only

Instructor’s Name:
Students’ Grade: / Level of Marks: High/Middle/Low

Instructions – PLEASE READ THEM CAREFULLY

 The Assignment must be submitted on Blackboard (WORD format only) via
allocated folder.
 Assignments submitted through email will not be accepted.
 Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
 Students must mention question number clearly in their answer.
 Late submission will NOT be accepted.
 Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
 All answered must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism).
 Submissions without this cover page will NOT be accepted.
Question: - 1(a). Should a nation tend to export or import goods for which it has a comparative
advantage? Explain. Why do economists oppose policies that restrict trade among nations?
(Minimum 500 words). (4 Marks)

Answer:
(Dickson P. R. 1996) A nation would always chose to produce the good which he has comparative

advantage or which he has lower opportunity cost of producing it. Thus a country can export the

goods which he has comparative advantage and import the goods which has higher opportunity cost.

A nation will tend to export the goods that they are making. (Hunt & Morgan 1995). The nation

specializes in one primary activity. This allows them to make the best use of their limited resources

and gain the most benefit from. The nation makes the good at a lower opportunity cost than other

countries, which gives them comparative advantage.

Economists oppose policies that restrict trade among nations because trade allows all countries to

achieve greater prosperity by allowing them to receive the gains from comparative advantage.

Restrictions on trade hurt all countries.

Economists generally prefer free trade policies and oppose trade restrictions between countries.

There are mainly two reasons behind it,

Additional markets to the local producer are built on free trade through policies. Domestic producer

whose products can compete with international products can gain benefits from free trade because he

has comparative advantage in producing the good and export it. These local producer finds

international clients for their products that why they tries to increase three dominance in international

goods market. This will increases the gross domestic product (GDP) of the domestic country.

Secondly, free trade give room to all foreign producer to sell their products at local markets which

provides diversity to the local consumer. For example if there is one local brand of specific product

in market then consumer do not have choice he have to purchase it but if a foreign brand come to the

market with similar product to compete the prices then consumer do have choices to purchase . it will

confirms two things - First, there are minimal chances of forming a monopoly as the foreign

competitors would drive down the high prices that are prevailing in the market due to low
competitiveness. Second, it leads to higher customer satisfaction as they get to try foreign products

which may be of better quality. According to (Kawai 1994) Trade policy can work positively or

negatively on productivity through several routes. Differences in trade policy are an important factor

in explaining the disparities in growth rates of developing countries. Policies makers or economists

encourage free trade a nation have better production possibilities and have much more to consume.

free trade improves the production efficiency which will increase the employment level also . The

Heckscher Ohlin model explains the world economy after world war two. It reveals the global

benefits to all when each country puts the most effort into exporting resources that are domestically

abundant. The benefit comes full circle when each country imports the resources it naturally lacks.

Because a country does not have to rely solely on internal markets, it can take advantage of the more

elastic demand.

Hence trade increases the output and the GDP of a country. Restrictions, import and export duties

brings in distortions lowering the equilibrium output

(b). Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an
hour. She spends 5 hours per day studying. (2 Marks)
a. Draw Maria’s production possibilities frontier for reading economics and sociology.

If Maria spends all five hours studying economics, she can read 100 pages, so that is the vertical

intercept of the production possibilities frontier. If she spends all five hours studying sociology,

she can read 250 pages, so that is the horizontal intercept. The opportunity costs are constant,

so the production possibilities frontier is a straight line.

Economics pages

100
 250
Sociology pages

b. What is Maria’s opportunity cost of reading 100 pages of sociology?

It takes Maria two hours to read 100 pages of sociology. In that time, she could read 40pages of

economics. So the opportunity cost of 100 pages of sociology is 40 pages of economics

References
Dickson, P. R. (1996). The static and dynamic mechanics of competition: a comment on Hunt and
Morgan's comparative advantage theory. Journal of marketing, 60(4), 102-106.
Hunt, S. D., & Morgan, R. M. (1995). The comparative advantage theory of competition. Journal of
marketing, 59(2), 1-15.
Kawai, H. (1994). International comparative analysis of economic growth: trade liberalization and
productivity. Developing Economies, 32(4), 373-397.