ECS3702/202/2021

Tutorial Letter 202/2021

International Trade
ECS3702

Semester 1 and 2

Department of Economics

IMPORTANT INFORMATION
This tutorial letter contains answers to the questions of
Assignment 02.

Define tomorrow.
 CONTENTS

1. Introduction .......................................................................................................................... 3

2. Feedback on Assignment 02 ............................................................................................... 3

3. Examination ......................................................................................................................... 6

4. Prescribed material for the examination .............................................................................. 6

5. Semester mark .................................................................................................................... 6

6. Copy of the May 2020 examination paper ........................................................................... 7

7. Communication with lecturers............................................................................................ 11

8. Concluding remarks ........................................................................................................... 11

2
 ECS3702/202
Dear Student

1. INTRODUCTION

To date, you should have received the following study material for ECS3702:

• Study guide
• Tutorial Letter 101/2021 (introductory tutorial letter and assignments)
• Tutorial Letter 001(complementary tutorial letter 101)
• Tutorial Letter 301/2021 (general information for all Economics students)
• Tutorial Letter 201/2021 (answers to the questions of Assignment 01)

This tutorial letter contains answers to the questions of Assignment 02.

Read this tutorial letter carefully, together with Tutorial Letter 001 and the other study material that you
received. In this way, you will find answers to many of your questions.

2. FEEDBACK ON ASSIGNMENT 03

Please note: The following are NOT model answers. They are only a guide on how you could answer
the questions.
Your study guide is aimed at guiding you through the prescribed book. You are expected
to study the relevant sections in the prescribed book as well as the study units in the
study guide. In other words, you must buy the prescribed book. The relevant sections in
the prescribed book are clearly indicated in each study unit of the study guide.

Read the questions carefully and make sure that you do what is asked. When you answer the questions,
keep the topic of the question clearly in mind. Do not go off on a tangent, filling many pages, as it will not
earn you marks. Therefore, make sure that each of your answers does in fact reflect what you have been
asked to do.

QUESTION 1 (50 marks)

Perform a google search and download and save the following article by Elizabeth Asiedu:

Asiedu, E. (2002) “On the Determinants of Foreign Direct Investment to Developing Countries: is
Africa Different?” World Development, Vol 30, No 1, pp 107-119.

Asiedu posits that developing countries, especially Sub Sahara Africa (SSA) experienced a
boom in FDI inflows between 1980 and 1981 and again between 1990 and 1991. From the
United Nations Conference on Trade and Development (UNCTAD) website (www.unctad.org)

3
 1. Obtain data (in Excel) on FDI inflows to (10 marks)

(i) SSA as a whole for the period 1980 to 2019

(ii) West Africa for the period 1980 to 2019
(iii) Southern Africa for the period 1980 to 2019
(iv) East Africa for the period 1980 to 2019
(v) North Africa for the period 1980 to 2019

2. Plot the data in a line diagram with 5 lines representing FDI inflows to each of the
regions in (1) above. NB: the title of the figure must be above the diagram and the
source must be indicated below the diagram. (5 marks)

Figure 1: FDI inflows to SSA regions (1980 – 2019)

50000
FDI inflows (Current USD, Millions)

40000

30000

20000

10000

0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

-10000
Year

Sub-Saharan Africa Eastern Africa Southern Africa Western Africa Northern Africa

Source UNCTAD online database (2021)

3. In no more than 300 words, explain the trend of FDI inflows between the regions. As part of your
discussion, indicate (i) the top 3 recipients in each region over the period 1980 to 2019 (ii)
discuss the ranking of the regions from highest to lowest recipient over the period. (5 marks)

Over the years, there has been an increase in FDI inflows to SSA as well as to the regions. There was a
steady increase in FDI inflows to the continent from the 1980s to the mid-2000s. this was followed by a
significant decline in 2006 before a significant rise in 2007 and 2008. The trend in FDI inflows to the region
showed a decline in 2009/2010, due in large part to the global financial crises that occurred. There has
been a gradual increase following this period, however the levels of FDI received has declined again from
2016.

A similar trend is observed for the regions on the sub-continent, although they show more fluctuations in
the inflow of FDI. Overall, North Africa has been the highest regional recipient of FDI between 1980 and
2019, followed by West Africa, East Africa and then Southern Africa. To understand the drivers of FDI, for
instance, West Africa’s FDI inflow is mainly in the mining and oil sectors with Nigeria accounting for over
34 percent of the FDI inflows into the region. According to Nehad (2012), higher FDI flows are attracted
4
 ECS3702/202
by the region’s growing population, abundance of natural resources and rising economic growth which
combine to offer opportunities for businesses and states (Amusa, 2017). The region’s FDI inflows have
also been advanced by oil and mineral exploration in other West African states like Ghana, Liberia and
Niger. South East Asia and Chinese interest in the agriculture sectors of some West African countries has
also contributed to boosting the region’s FDI inflows. According to Anyanwu (2011), civil conflicts as well
as governance challenges have been the two main factors that have contributed to East Africa’s limited
ability to attract higher FDI inflows. As with West Africa, the oil sector is the largest recipient of FDI, with
Sudan, Ethiopia and Uganda being the destination of choice for investors.

4. According to Asiedu (2002), what are some of the benefits that make FDI a significant source
of finance to SSA? (5 marks)
➢ Source of capital
➢ Employment creation
➢ Managerial skills
➢ Technology
➢ Accelerates growth and development

5. What are the reasons why SSA has had to rely on external capital flows such as FDI? (3 marks)

➢ Most SSA countries do not have access to international capital markets and so rely on FDI and
loans
➢ Official lending to the region has declined over the past decade
➢ Foreign per capita to SSA declined from an average of $35 over 1989 – 1992 to about $28 from
1993 – 1997.

6. What are the factors that determine FDI inflows to SSA and what type of relationship do each
of these factors have with FDI? (3 marks)

➢ Trade openness (+ relationship)

➢ Infrastructure development (+ relationship)
➢ Return on investment (+ relationship)

➢ FDI increases with increased openness to trade, infrastructure development and return on
investment.

7. Does SSA fair better than, worse than or equal with other regions with the same
level of the identified determinants? (2 marks)
➢ The average FDI/GDP for a country in SSA is about 1.3% less than that of a comparable
country outside the region.

8. You may have noted that some of the top recipients of FDI inflows to the region are
also noted to have some of the highest corruption levels. Explain what this suggest
and how this is possible? (3 marks)

5
 ➢ This essentially suggests that political risk is not a significant determinant of FDI inflows to
these countries. The FDI to countries like Nigeria, Angola (FDI in oil) is so profitable that the
returns after adjusting for risk is quite substantial.

9. Discuss briefly, the differences and reasons between SSA and Non-SSA countries experience
of FDI inflows (4 marks)

➢ Infrastructure development promotes FDI to non-SSA countries, but has no significant

impact on FDI inflows to SSA countries, ceteris paribus
➢ Openness to trade promotes FDI to both SSA and non SSA countries, however the marginal
benefit from increased openness is less for SSA countries. Therefore, trade liberalisation
increases FDI to non-SSA countries than SSA countries.
➢ High returns on capital promotes FDI to non-SSA countries but has no significant impact
on FDI flows to SSA countries.
➢ Countries in SSA have received on average less FDI than countries in other regions, by
virtue of their geographical location.

10. At the end of your answers, on a separate page, present the downloaded FDI
inflows data in a table (5 marks)

Year Sub-
Saharan Eastern Southern Western Northern
Africa Africa Africa Africa Africa
1980 247,9838 196,85 132,1939 -434,39 152,37
1981 1526,133 38,99 195,3062 946,8528 426,78
1982 1758,902 114,63 340,1792 902,6435 315,19
1983 897,5398 75,85 93,88696 429,6223 425,45
1984 974,2626 76,22 488,9746 297,1317 910,6
1985 989,2323 128,9286 -361,579 471,584 1453,07
1986 646,3406 118,124 65,71303 138,974 1124,14
1987 1415,373 278,8977 -13,5371 814,8976 1027,77
1988 1568,226 177,3266 277,3951 754,3064 1463,73
1989 3043,447 301,4372 -79,1706 2729,81 1649,83
1990 1689,662 389,2586 91,58565 1553,428 1155,481
1991 2622,059 121,0882 452,9547 1367,17 914,0838
1992 2204,804 147,7788 212,2384 1401,332 1595,783
1993 3032,056 531,9382 -134,775 2121,561 2411,694
1994 3827,13 359,7723 569,3128 2787,391 2277,357
1995 4436,917 680,3645 1531,518 1860,777 1228,215
1996 4579,672 718,3853 1067,186 2615,052 1468,178
1997 8283,262 1242,534 4016,876 2718,086 2746,91
1998 6997,963 1746,955 913,5835 2507,078 2993,249
1999 8544,351 1555,824 1692,639 2338,034 3347,949
2000 6401,017 1467,537 1273,186 2131,062 3250,129
2001 14614,95 1584,368 7237,635 2074,984 5357,613
2002 10889,7 1734,309 2278,77 2913,274 3871,562
2003 12912,53 2017,329 1280,449 3363,907 5265,581
2004 11235,4 2334,418 1541,205 3655,843 6440,999
2005 17675,03 2538,59 7292,305 7124,264 11613,11
6
 ECS3702/202
2006 13027,04 3329,814 1329,752 7047,535 21594,24
2007 27956,55 6224,578 7878,709 9555,383 23096,56
2008 35804,46 6837,784 10567,08 12357,47 22205,14
2009 38511,17 7494,714 8708,942 14764,24 18141,18
2010 30832,39 10220,47 4266,915 12024,28 15745,92
2011 37411,9 11142,29 5522,729 18341,17 7548,344
2012 40331,8 14818,77 5854,387 15918,08 15597,99
2013 39369,38 15488,48 9272,178 16565,46 12757,39
2014 41913,2 14487,41 6847,054 12121,45 11995,06
2015 45237,88 13362,5 3213,165 10714,43 12326,58
2016 32173,83 12420,26 2926,103 11955,12 13849,01
2017 28261,97 12845,16 2709,642 11509,97 13273,16
2018 35238,54 12938,22 6057,552 13716,85 15337,99
2019 31706,9 11537,96 5115,812 10870,43 13661,22
Source: UNCTAD https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx

11. After the table embed the downloaded article. To embed a file, put your mouse
where you want the article to be on the page, then click on insert on the top of your
screen, then click on object, then, create from file, then browse the file from where it
is saved on your computer (easier to save the article on desktop) then click ok, and
then display as icon. The article will be embedded in the page. (3 marks)

the determinants of
FDI in SSA. Asiedu.pdf

References (2 marks)

Asiedu, E. (2002) “On the Determinants of Foreign Direct Investment to Developing Countries: is Africa
Different?” World Development, Vol 30, No 1, pp 107-119.

Nehad, I. (2012). FDI- a blessing or a curse for West Africa? The case for foreign direct investment.
International Relations and Security Network (ISN).

United Nations Conference on Trade and Development (UNCTAD) (2021).

https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx

NB: where students’ submission are found to be similar, the cases will be referred for disciplinary
action.

3. EXAMINATION

The examination will be an online examination and will be marked out of 100. There will be 4 questions
and all the questions are compulsory.

Writing in bullet or point form or using asterisks (*) is unacceptable, except when listing
assumptions. You will be penalised for failing to adhere to this instruction.
7
Ensure that you prepare thoroughly for the final examination by concentrating on the prescribed material
identified in your study guide.

4. PRESCRIBED MATERIAL FOR THE EXAMINATION

You will be examined on any of the prescribed chapters outlined in the study guide. Therefore, ensure that
you are familiar with the module content, including the relevant diagrams. Given that the exam is a take
home examination, you will be required to apply your understanding of the module content to current trade
issues and hypothetical case scenarios. In other words, the questions are going to be largely application
based.

5. SEMESTER AND FINAL MARK

As indicated in Tutorial Letter 101, your semester mark will be based on your assignment marks. The first
assignment will contribute 40%, the second assignment will contribute 60% to your semester mark. Your
final mark will be calculated by using the following weights:

Semester mark: 20%

Final examination mark: 80%
Total: 100%

6. COPY OF THE MAY 2020 EXAMINATION PAPER

You are provided you with the answers to Question 1. You are strongly encouraged to work through the
other questions on your own. Please make this part of your examination preparation and remember that
you are welcome to contact us if you need guidance.

Answer ALL four (4) questions. Each question carries 25 marks.

QUESTION 1

QUESTION 1(a)

Consider the following scenarios:

Scenario A
South Africa Namibia

Gold [ ton/hr] 8 2

Fish [ ton /hr] 2 4

Scenario B
South Africa Namibia

Gold [ ton/hr] 8 4

Fish [ ton /hr] 4 2

8
 ECS3702/202
(a) For Scenarios A and B, in which commodity does South Africa and Namibia have an
absolute advantage and absolute disadvantage? Explain. (5)

In scenario A: (2.5 marks)

South Africa has an absolute advantage in the production of gold and an absolute
disadvantage in the production of fish. Namibia has an absolute advantage in producing fish
and an absolute disadvantage in producing gold. Reason: using the same resources and in
the same amount of time, South Africa can produce more gold than Namibia and Namibia
can produce more fish than South Africa.

In Scenario B: (2.5 marks)

South Africa has an absolute advantage in the production of both gold and fish while Namibia
has an absolute disadvantage in the production of both commodities

(b) For scenarios A and B, indicate the commodity in which South Africa and Namibia have a
comparative advantage and disadvantage. [You must show your workings] (8)

Scenario A:

South Africa (1 mark):

Opportunity cost of producing gold
8g = 2f
1g = X

2fg /8g= 8gx/8f

1g = 1/4f
1g = 0.25f

Opportunity cost of producing fish

2f =8g
If = X

Cross multiply:
8fg/2fx
1f = 4g

Namibia (1 mark)
Opportunity cost of producing gold
2g = 4f
1g = X
4gf/2g = 2gx/2g
1g = 2f
Opportunity cost of producing fish
4f = 2g
1f = X
Cross multiply

9
 2gf = 4fx
Divide both sides by 4f
1f = 0.5g

In scenario A:
South Africa has a comparative advantage in producing gold and a comparative
disadvantage in producing fish. (1 marks)
Namibia has a comparative advantage in producing fish and a comparative disadvantage in
producing gold (1 marks)

Scenario B:

South Africa: (1 mark)

Opp cost of producing gold Opp cost of producing fish
4f =8g
8g = 4f 1f = X
1g = X

4fg /8g= 2gx/8f 8fg/4f = 4fx/4f

1g = 1/2f 1f = 2g
1g = 0.5f

Namibia (1 mark)
Opportunity cost of producing gold Opp cost of producing fish
2f = 4g
4g = 2f 1f = X
1g = X
2gf/4g = 4gx/4g 4gf/2f = 2fx/2f
1g = 0.5f 1f = 2g

In scenario B:
Neither country has a comparative advantage in either product (2 marks).

(c) In scenarios A and B, determine, using the classical theories, whether trade is possible
between South Africa and Namibia and explain what the pattern of trade will be. (7)

In Scenario A:

Trade is possible based on absolute advantage and comparative advantage (1 mark)

Pattern of trade: Under absolute advantage, South Africa will export gold to Namibia and
import fish and Namibia will export fish to South Africa and import gold. Under

10
 ECS3702/202
comparative advantage, South Africa will export gold to Namibia and import fish and
Namibia will export fish and import gold

In Scenario B:

No Trade is possible between both countries under both absolute and comparative
advantage (2 marks) as South Africa has an absolute advantage in producing both goods
over Namibia and under comparative advantage, there is equal advantage between both
countries in both goods

(d) If South Africa exchanges 8 tons of gold for 8 tons of fish with Namibia

Note: This question should have read Is South Africa exchanges 12g for 12f with Namibia. The
answers provided are based on this correction.

(i) How much does South Africa gain in terms of fish? (5)
If South Africa exchanged 12g for 12f, it gains 3f

(ii) The 12g Namibia gets would have cost it 4hrs to produce. Those 4hrs would have produced
24f (6 X4) and it would have gained (24f – 12f) = 12f
(iii) What is the range for mutually beneficial trade?
9c < 12g < 12
[25]

QUESTION 2

QUESTION 2 (a)
Globalisation has meant that countries are increasingly dependent on each other. The current coronavirus
pandemic has had a significant immediate impact on all economies.
Discuss the potential trade effects and channels through which the pandemic can affect a developing
economy such as South Africa. [10]

QUESTION 2 (b)

Evaluate the validity of the statement below:

If Ghana is better at producing commodity X and commodity Y than Kenya, then Ghana is better off not
trading with Kenya.
NB: Your evaluation of the validity of the above statement must be based on the theory that supports the
statement and the theory that contradicts the statement. All assumptions and criticisms must be included
in your discussion. [15]
[25]

QUESTION 3
11
In 2019, the South African president, Cyril Ramaphosa embarked on a drive to attract $100 Billion in new
investments within five years. This underscores the significance of FDI as a source of capital for South
Africa.
(i) Discuss some of the possible reasons why investors would be attracted to the South African
economy [7]
(ii) Are there any factors that may dissuade investors from investing in the South African
economy?[9]
(iii) Does FDI benefit or disadvantage the South African economy? Explain [9]

NB: Apply your knowledge of the general motives, benefits and costs of FDI, to the South African context.
This means your discussion cannot be generic. It must speak to the South African context or realities

[25]
QUESTION 4

QUESTION 4a

Using the example of two nations, explain the effect of international trade on the difference in factor prices
between the nations. (10)

QUESTION 4(b)
Using the example of two nations, explain the effect of international trade on relative factor prices and
income within both nations. (15)
[25]

TOTAL: 100

7. COMMUNICATION WITH LECTURERS

12
 ECS3702/202

The lecturers for this module are:

• Dr K Amusa – 012 433 4642

• Mr M Marais – 012 433 4623

While we are happy to help you if you do not understand some of the economic principles, we do expect
that final-year students will try to solve problems themselves.

Do not contact your lecturers with administrative queries. If you have an administrative query, contact the
relevant department as listed in the brochure Study @ Unisa and on the module page on myunisa.

Please note: The telephone lines at Unisa are very busy during examination time (October). There is
no guarantee that you will be able to get through to your lecturers in the last days before
the examination. Therefore, go through your work in good time and if you have
problems, contact us well before the examination.

8. CONCLUDING REMARKS

We hope that you have enjoyed studying this module. We wish you well as you prepare for the
examination.

Kind regards

Dr K Amusa

13