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Name: DƯƠNG THỊ KIỀU TRANG Roll number: HS163327

Room No: Class: IB16112

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ECO121_Test 01_Individual
Assignment 01

Question1. (2 points)
1. a. What is defined as absolute advantage?

- Absolute advantage is the ability to produce a good using fewer inputs than another
producer.

b. What is defined as comparative advantage?

- Comparative advantage is the ability to produce a good at a lower opportunity cost

than another producer.

c. Case 1: Output approach

Two commodities and two countries
Given the resources, Singapore and Malaysia can produce the following products –
television sets and cars (see Table 01)
Countries TV sets Cars (units)
Singapore 100 50
Malaysia 60 40
Table 01
+ Which country has the absolute advantage in the production of both TV sets and
Cars over the other?

- Singapore has an absolute advantage in both TV sets and Cars, 100 TV sets with 50
cars compared to 60 TV sets and 40 cars.

+ Which country has the comparative advantage either in the production of TV sets or
in the production of Cars over the other?
 - Singapore has a comparative advantage in TV sets because:
 The opportunity cost of 1 TV set in Singapore is 0,5 cars.
 The opportunity cost of 1 TV set in Malaysia is 0.67 cars.

- Malaysia has a comparative advantage in cars because:

 The opportunity cost of 1 car in Singapore is 2 TV sets.
 The opportunity cost of 1 car in Malaysia is 1.5 TV sets.

d. Case 2: Input approach

Two commodities and two countries
Give the resources, America and England can produce one unit for both Steel and Coal
in terms of number of working hours shown as follows:
Countries One unit of Steel One unit of Coal
required required
America 80 man-hours 90 man-hours
England 120 man-hours 100 man-hours
Table 02
+ Which country should specialize in the production of Steel?

- The opportunity cost of 1 unit of Steel:

 In America: 80:90= 8/9 unit of Coal
 In England: 120:100=1.2 unit of Coal
 America should specialize in the production of Steel.

+ Which country should specialize in the production of Coal?

- The opportunity cost of 1 unit of Coal:

 In America: 90:80=9/8 unit of Steel
 In England: 100:120=5/6 unit of Steel
 England should specialize in the production of Coal.

e. Case 3: Input approach

Two countries but multiple commodities
The following Table 03 shows the numbers of man – days taken to produce an
equivalent amount of six commodities in each of the two countries – Switzerland and
Sweden.
Countries Coal Cotton Wool Iron Wheat Maize
Switzerland 120 60 70 100 140 80
Sweden 100 25 35 90 90 20
Table 03
+ Assuming that there are no other costs of production. Which two commodities is
Sweden most likely to import from Switzerland?

Sweden has the most ability to import Cotton and Maize products from Switzerland.
Because if comparing in terms of comparative advantage, the difference between
cotton and maize products is 0.41 and 0.25 (Sweden/Switzerland).

Question 2 (3 points):
Suppose there is an economy that produces only two goods: tequila and peyote. In 2008, the
economy produced 100 litres of tequila and 200 peyote plants. The unit prices (per litre or per
plant) in 2008 were $100 and $500. 1000 people were employed in the tequila sector, and the
peyote sector employed 500.

In 2009, the weather was particular sunny and hot, which is good for tequila production but
bad for the cultivation of peyote. As a result, the economy produced 120 litres of tequila but
only 191 peyote plants in 2009.

The tequila and peyote sold for $90 per litre and $550 per plant that year. 1100 people were
employed in the tequila sector, while only 450 people worked in the peyote sector.

Answer the following questions:

a. How much is Nominal GDP in 2008 and 2009? What is the percentage change?

GDP08 = 100 × $100 + 200 × $500 = 10000 + 100000 = $110000

GDP09 = 120 × $90 + 191 × $550 = 10800 + 105050 = $115850
%∆GDP = (115850 – 110000)/110000 ≈ 5.32%

b. How much is Real GDP in 2008 and 2009, by considering 2008 as the base year?
What is the percentage change?

GDP08 = 100 × $100 + 200 × $500 = 10000 + 100000 = $110000

GDP09 = 120 × $100 + 191 × $500 = 12000 + 95500 = $107500
%∆GDP = (107500 – 110000)/110000 ≈ −2.27%

c. How much is the GDP deflator in the two years? By what percentage does the
price level change from the base year to 2009?

- The GDP deflator is the ratio of nominal GDP to real GDP. In the base year, nominal
GDP equals real GDP, so the GDP deflator is 1. In 2009 it is approximately 1.08, so
the price level rose by about 8%.

d. What was the growth rate of average labour productivity for the whole economy
between 2008 and 2009?

- The average labour productivity in 2008 was 110000/(1000 + 500) = $73.33 per
worker while in 2009
It was 107500/(1100 + 450) = $69.35 per worker.
Hence, its growth rate is (69.35 − 73.33)/73.33 = −5.43%.

Question 3 (2 points)
In the country of Kwaki, people produce canoes, fish for salmon, and grow corn. In one year
they produced 5000 canoes using labor and natural materials only, but sold only 4000, as the
economy entered a recession. The cost of producing each canoe was $1000, but the ones that
sold were priced at $1250. They fished $30 million worth of salmon. They used $3 million of
the salmon as fertilizer for corn. They grew and ate $55 million of corn. What was Kwaki's
GDP for the year?
- Inventories are valued at the cost of production, so the 1000 canoes in inventory were
valued at $1000 each for a total of $1 million. Four thousand canoes at $1250 each totaled $5
million. Salmon as a final good were worth $27 million and corn worth $55 million was
grown.
So total GDP = $1 + $5 + $27 + $55 = $88 million.

Question 4. (3 points)
+ What are the benefits/gains from international trade? Write an essay with 500 words and
provide your answers with real example in the context of Vietnam international trade relations

International trade is the exchange of goods and services between countries. It includes export
and import. In which, exports are goods produced domestically and sold abroad. To export
means to sell domestically produced goods abroad. And imports are goods produced abroad
and sold domestically. To import means to purchase goods produced in other countries. The
importance of international trade was recognized early on by political economists such as
Adam Smith and David Ricardo.
Firstly, it increased revenues, because one of the top advantages of international trade is that
we may be able to increase your number of potential clients. Each country we add to our list
can open up a new pathway to business growth and increased revenues. In 2019, the total
import and export turnover of goods of Vietnam set a new record with 516.96 billion USD.
The trade balance of goods had a trade surplus of $9.9 billion, the year with the largest trade
surplus ever, much higher than the trade surplus of $2.1 billion in 2017. Secondly, it's
decreased competition because our product and services may have to compete in a crowded
market in a certain nation, but we may find that we have less competition in other countries.
Thirdly, it makes longer product lifespan. Because focusing only on the domestic market may
expose us to increased risk from downturns in the economy, political factors, environmental
events, and other risk factors. Fourthly, getting paid upfront may be one of the hidden
advantages of international trade, so it is easier for government to manage cash flow. Fifthly,
one of the advantages of international trade is that we may have an outlet to dispose of surplus
goods that we're unable to sell in your home market. Sixthly, it has the opportunity to
specialize. International markets can open up avenues for a new line of service or products. It
can also give us an opportunity to specialize in a different area to serve that market. Seventhly,
one of the significant advantages of international trade is market diversification. Focusing only
on the domestic market may expose us to increased risk from downturns in the economy,
political factors, environmental events, and other risk factors. Becoming less dependent on a
single market may help us mitigate potential risks in our core market. Finally, our nation
which joins in international trade has benefited from currency exchange.
In conclusion, trading globally gives consumers and countries the opportunity to be exposed to
goods and services not available in each own country. As a result of international trade, the
market is more competitive. This ultimately results in more competitive pricing and brings a
cheaper product home to the consumer.

+ What are the disadvantages of international trade? Write an essay with 500 words and
provide your answers with real example in the context of Vietnam international trade relations

The global economy has made it easier to ship products or sell a service almost anywhere in
the world. However, there are several disadvantages of international trade which affect the
country.
Firstly, it's the problem of the impediment in the development of home industries.
International trade has an adverse effect on the development of home industries. It poses a
threat to the survival of infant industries at home. Due to foreign competition and unrestricted
imports, the upcoming industries in the country may collapse. Secondly, it makes smaller
countries dependent on the economy that big countries reinvest in their countries. The
underdeveloped countries have to depend upon the developed ones for their economic
development. Such reliance often leads to economic exploitation. For instance, most of the
underdeveloped countries in Asia including Vietnam have been exploited by European
countries. Thirdly, it creates political dependence. International trade often encourages
subjugation and slavery. It impairs economic independence which endangers political
dependence. Fourthly, it is the mis-utilization of natural resources. Excessive exports may
exhaust the natural resources of a country in a shorter span of time than it would have been
otherwise. This will cause the economic downfall of the country in the long run. Fifthly, the
nation can import harmful goods. The import of spurious drugs, luxury articles, etc. adversely
affects the economy and well-being of the people. In fact, at present, the Vietnamese market
has a lot of fake goods imported from China, it is difficult to recognize what is fake and what
is real to buy and use. Sixthly, it's the problem of storage of goods. Sometimes the essential
commodities required in a country and in short supply are also exported to earn foreign
exchange. This results in the shortage of these goods at home and causes inflation. Moreover,
its danger to international peace can happen. Because international trade gives an opportunity
to foreign agents to settle down in the country which ultimately endangers its internal peace.
It is also the reason for rivalries amongst nations due to competition in the foreign markets.
Finally, it promotes the lopsided development of a country as only those goods which have a
comparative cost advantage are produced in a country. During wars or when good relations
do not prevail between nations, many hardships may follow.
In conclusion, international trade can actually be bad for smaller nations, putting them at a
greater disadvantage on the world stage.