UNIVERSITI TEKNOLOGI MARA KELANTAN BRANCH

KOTA BHARU CAMPUS

FACULTY OF BUSINESS & MANAGEMENT

ECO561

ASSESSMENT 1: INDIVIDUAL ASSIGNMENT

NAME :NURUL NAZILAH BINTI MOHD FADZILAH

MATRIX NUMBER : 2020459306
CLASS : D2BA2503A
LECTURER : MADAM NOR ZURIATI AMANI AB RANI
CHAPTER 1
1. Explain two (2) international macroeconomic problems facing the world today.

a) Resource Scarcity, Environmental Degradation, Climate Change, and

Unsustainable Development.
Resource scarcity, environmental degradation and climate change are
threatened the growth in rich countries and development in poor
countries. In the face of rapidly growing demand, particularly by China
and India, and supply rigidities in producing nations, the price of
petroleum and other raw materials has risen sharply during the past
few years and so has the price of food.
b) Excessive Fluctuations and Misalignment in Exchange Rates and Financial
Crises.
Periodic financial crises have also led to financial and economic
instability and dampened growth in advanced and emerging markets
alike—witness the financial crisis that started in Southeast Asia in
1997 and in the United States in 2007. These can disrupt the pattern
of international trade and specialization and can lead to unstable
international financial conditions throughout the world. They have
also led to renewed calls for reforms of the present international
monetary system and for more international coordination of
economic policies among the leading economies.

2. Define domestic trade and international trade. Explain two (2) benefits of
international trade.

Domestic trade:
-the exchange of domestic goods within the boundaries of a country.

International trade:
- the exchange of goods and services between countries.

Two benefits of international trade:

a) Utilization of Surplus Produce
- International trade enables different countries to sell their surplus products
to other countries and earn foreign exchange.
b) Greater Variety of Goods Available for Consumption
- International trade brings in different varieties of a particular product from
different destinations. This gives consumers a wider array of choices which will not
only improve their quality of life but as a whole it will help the country grow.
CHAPTER 2
1. Explain the theory of mercantilism
- An economic theory that advocates government regulation of international trade to
generate wealth and strengthen national power. Merchants and the government
work together to reduce the trade deficit and create a surplus. The greater the flow
of gold and silver, the higher the standard of living.

2. Assume that nation 1 can use a given amount of its resources to produce either 15
airplanes or 12,000 automobiles while Nation 2 can employ the same amount or
resources to produce either 24 airplanes or 18,000 automobiles.

a) Define the law of absolute advantage and identify which country has absolute
advantage in producing airplanes and automobiles.
-Law: Even if one nation is less efficient than (has absolute disadvantage with
respect to) the other nation in production of both commodities, there is still a
basis for mutually beneficial trade.
-Nation 2 has absolute advantage in producing airplanes and automobiles.

b) Based on your answer, state whether trade could take place between the two
countries according to the law of absolute advantage.

-Yes, The only difference

between nation 1 and nation 2 is that the nation 1 now produces only 15 instead
of 24. Thus, the nation 2 now has an absolute disadvantage
in the production of both airplane and automobile with respect to the nation 2.

c) Compute the opportunity cost of producing one unit of airplane and one unit of
automobile and determine their comparative advantage.

Airplanes Automobiles
Nation 1 15 12000
Nation 2 24 18000

Opportunity cost of producing one Opportunity cost of producing one

unit of airplane unit of automobiles
12000/15= 800 15/12000= 1/800
18000/24= 750 24/18000= 1/750

-Nation 1 has less opportunity cost in automobile meanwhile nation 2 have less
opportunity cost in aeroplane.
d) Based on your answers in (a) and (b) above, state the reason the law of
comparative advantage is more superior than the law of absolute advantage.

- According to the law of comparative advantage, both nations can

gain if the Nation 2 specializes in the production of aeroplanes and automobile
some of it in exchange for Nation 1 aeroplanes and automobiles.
in a two-nation and two-commodity world, once it is determined that one nation
has a comparative advantage in one commodity, then the other nation must
necessarily have a comparative advantage in the other commodity.

CHAPTER 3
1. Using an indifference curve and a production possibilities curve, sketch a diagram to
show an autarky equilibrium of a nation. Briefly describe your answer.

2. Differentiate between complete specialization and incomplete specialization. Explain

why incomplete specialization is more realistic. Sketch diagrams to explain your
answer.
 CHAPTER 4

1. State the Heckscher-Ohlin Theorem and list any two (2) of its assumptions.
- An economic theory that proposes that countries export what they can most
efficiently and plentifully produce. Also referred to as the H-O model and it's used to
evaluate trade and, more specifically, the equilibrium of trade between two
countries that have varying specialties and natural resources.

Assumptions
- It is assumed that there are only two nations (1 and 2) with two goods for trade (X
and Y) and two factors of production (capital and labour).
-For producing the goods, both of the nation is using the same technology and they
use uniform factors of production.

2. Assuming two nations and two communities, explain the pattern of trade by using
the Heckscher-Ohlin (H-O) theorem.
Before trade
AfterAfter
trade
betrade