U.S U.

K
Wheat 6 1
Cloth 4 5

3.1 According to the theory of comparative advantage, which commodity shuold be exported by which
country? Explain your answer

The U.S has an absolute advantage in both wheat and cloth with respect to the United Kingdom, but
since its absolute advantage is greater in wheat (6:1) than in cloth (4:2), the U.S has a comparative
advantage in wheat. The UK’s absolute disadvantage is smaller in cloth, so its comparative advantage
lies in cloth.

U.S U.K
Wheat 6 1
Cloth 4 2

Both nations would gain by exchanging 6W for 6C.

Since The United States could exchange 6W for 4C domestically, the U.S would gain if it could exchange
6W for more than 4C from the UK

In the UK, 6W = 12C. Anything less than 12C that the UK must give up to obtain 6W from the US
represents a gain from trade for the UK.

-> the US gains to the extent that it can exchange 6W for more than 4C from the UK.
The UK gains to the extent that it can give up less than 12C for 6W from the US

-> 4C < 6W < 12C

Commodity Country 1 Country2

X 80 (X1 = ¼ Y1) 40 (X2 = ½ Y2)
Y 20 (Y1 = 4 X1) 20 (Y2 = 2 X2)

b. During an hour, country 1 can produce 80 products of X and 20 Products of Y

80X =20Y khi và chỉ khi X = ¼ Y khi và chỉ khi Y = 4X
During an hour, country 2 can produce 40 products of X and 20 products of Y
40X = 20Y khi và chỉ khi X = ½ Y
Mutually beneficial price: ¼ Y < X < ½ Y
2. What is the meant by an import tariff? Using partial equilibrium analysis, indicate the trade and
welfare effects of an import tariff imposed by a small nation. Explain factors responsible for the
protection cost, or deadweight loss of the tariff, to the economy.

Definition: An import tariff is a duty on the imported commodity

Partial equilibrium analysis:

Tariff effects on the importing country’s consumers. Consumers of the product in the importing

country are worse off as a result of the tariff. The increase in the domestic price of both imported

goods and the domestic substitutes reduces consumer surplus in the market.

Tariff effects on the importing country’s producers. Producers in the importing country are better

off as a result of the tariff. The increase in the price of their product increases producer surplus in the

industry. The price increases also induce an increase in the output of existing firms (and perhaps the

addition of new firms), an increase in employment, and an increase in profit, payments, or both to

fixed costs.

Tariff effects on the importing country’s government. The government receives tariff revenue as a

result of the tariff. Who will benefit from the revenue depends on how the government spends it.
These funds help support diverse government spending programs; therefore, someone within the

country will be the likely recipient of these benefits.

Tariff effects on the importing country. The aggregate welfare effect for the country is found by

summing the gains and losses to consumers, producers, and the government. The net effect consists

of two components: a negative production efficiency loss (B) and a negative consumption efficiency

loss (D). The two losses together are typically referred to as “deadweight losses.”

Because there are only negative elements in the national welfare change, the net national welfare

effect of a tariff must be negative. This means that a tariff implemented by a small importing

country must reduce national welfare.

Trade effects: Tariffs increase the prices of imported goods. Because of this, domestic producers

are not forced to reduce their prices from increased competition, and domestic consumers are left

paying higher prices as a result. The overall effect is a reduction in imports, increased domestic

production, and higher consumer prices.

Factors:

●From domestic consumers (who pay higher price for the commodity) to domestic
producers (who receive the higher price)

●From nation’s abundant factor (producing exports) to the scarce factor (producing
imports).

●This leads to inefficiencies, or protection costs (deadweight losses).

The reduction in consumption associated with the tariff creates a deadweight loss.

Consumers who should be buying pomelos, if they could get them at the true price, but
are not buying them at the high price created by the tariff. This area is a deadweight
loss. It's lost value from a reduction in consumption
3. Explain why governments intervene in trade? Critically assess infant industry
argument for protectuion

Why:

Governments also intervene in trade policy for economic reasons. One of the biggest reasons is to
protect new industries from fierce competition. This matter is especially important to the industries in
developing countries who might not survive up against larger nations. One problem with this
ideology is that protecting infant industries can sometimes create inefficient organizations that are
not suited to eventually enter the global business arena. For example, due to protectionism means,
Brazil was able to develop the world's tenth largest auto industry, due to tariff barriers and quotas.
Unfortunately, when those protectionary means were removed, Brazil's foreign imports dramatically
increased, and the auto industry could not compete with their competition's products.
The last economic reason for government intervention is based on the strategic trade policy, which
cites that, due to scale economies, only a few large global firms would survive if not for government
intervention. Many economists are concerned with this type of intervention, in that it hurts companies
that are early entrants into a new product. Also, many economists feel that a government that
pushes to have their domestic firm remain in control of an industry is acting selfishly and will end up
hurting global competitors and the global economy

Infant-industry Argument

●Requires several qualifications which, together, take away most of its significance:

1.More justified for developing nations than industrial nations.

2.May be difficult to identify which industry qualifies for protection, which, once

given, is difficult to remove.

3.What trade protection can do, an equivalent production subsidy to the infant

industry can do better.

4. what is meant by the exchange rate and give example. Why state bank of Vietnam
intervene in the foreign exchange market?

An exchange rate is the value of one nation's currency versus the currency of another nation or
economic zone. For example, how many U.S. dollars does it take to buy one euro? As of Dec.
13, 2019, the exchange rate is 1.10, meaning it takes $1.10 to buy €1.

Why:

The central bank takes measures to promote the concentration of foreign exchange sources
(especially foreign currencies) in its hands, through which the State can use it rationally and
effectively for the needs of economic development. and foreign affairs. At the same time, using
foreign exchange policy as an effective tool to implement monetary policy, through trading
foreign exchange in the market to intervene in the exchange rate when necessary to stabilize the
external value of the currency. , the impact on the amount of money supplied.

The State Bank of Vietnam has said it is ready to intervene in the market when the intervention
rate is lower than the current listed exchange rate on a large scale by spot or forward transactions
to stabilise the foreign exchange market.

The State Bank is always proactive in its plans to adjust the exchange rate and is willing to
intervene in the foreign exchange market when there is a problem in the market's supply and
demand, ensure a smooth exchange rate in the foreign exchange market, ensure control of
macroeconomic stability.