International Economics

Module
ECIN01-7
NQF LEVEL 7

FORMATIVE ASSESSMENT – ASSIGNMENT C

Assignment C (ECIN01-7/DLO2 05/2023)

Exam date 23 May 2023

Week 5

Marks 50

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 Marking guidelines

Assignment C (ECIN01-7/DLO2 05/2023)

Total: 50 marks

Note to student: You will be penalised for the copying of theory without
explanation/application to the scenario provided. You should use the theory in
support of your own answer. Non-application will result in a zero mark being
awarded.

Further research (i.e. consulting sources other than your Milpark study guide or
prescribed textbook) will be necessary for you to answer this question fully.
Marks will be deducted for failing to reference according to the Milpark Reference
Guide.

SECTION B (50 MARKS)

Answer all the questions.

Question 1 (10 marks)

Graphically illustrate and explain how a small country can consume outside of its
production possibilities frontier (PPF) with trade. (10)

Answer:

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In autarky, the home country is in equilibrium at point E. With the opening of
trade, it now faces the international terms of trade, (PX/PY)2. Given the relatively
higher international price of the X good, production moves to E9, the point of
tangency between the international terms of trade and the PPF. At the same
time, the Y good is relatively less expensive at international prices, so consumers
increase their relative consumption of it and begin consuming at point C9, where
the terms of trade are tangent to the highest community indifference curve
attainable. C9 lies outside the PPF and is obtained by exporting the amount x3x2
of the X good and exchanging it for y2y3 imports of the Y good. The country is
clearly better off because trade permits it to consume on the higher indifference
curve CI2.

Question 2 (10 marks)

Briefly explain the demand and factor intensity reversal in the context of the
Heckscher-Ohlin (H-O) model and provide one real world example of this
situation. (10)

Answer:
Suppose demand in a country is so oriented towards a particular commodity, the
commodity using relatively intensively its relatively abundant factor, that the
relative pre-Trade price of that commodity is greater than that in its trading
partner. With trade, this country would then expand the production of the
commodity that uses relatively intensively its scarce factor and export that
commodity, while importing the commodity that uses relatively intensively its
abundant factor. The opposite happens in its trading partner and a pattern of
trade emerges that is directly contradictory to that predicted by H-O because of
a particular set of demand, and hence this would be called demand reversal. An
example would be South Africa importing clothes from the U.S.

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Factor intensity reversal refers to a situation where two commodities are each
intensive in a particular factor of production regardless of factor prices. However,
the nature of factor substitution for each commodity can be sufficiently different
so that the relative factor intensities can change as factor prices change. For
example, cloth is a commodity relatively labour-intensive regardless of factor
prices but due to the nature of factor substitution (maybe new technology) when
the labour of labour is expensive, cloth becomes a capital-intensive commodity.

Question 3 (10 marks)

Read the extract from a news article below and answer the question that follows:

The fourth industrial revolution’s impact on South African jobs

By Lazarus Tshwari
Director and Media Analyst at Critical Media

South Africa has recently hosted the 28th World Economic Forum on Africa in
Cape Town under the theme “Shaping Inclusive Growth and Shared Futures in
the Fourth Industrial Revolution (4IR)” and African countries were urged to
jump on the opportunities of the 4IR as it promises gains in scientific
knowledge, human health and economic growth and to vastly improve the
lives of humanity. 4IR has taken centre stage as the propeller of the future
development of humankind and is explained as the current and
developing environment in which disruptive technologies and trends such as
the Internet of Things, robotics, virtual reality, and artificial intelligence are
changing the way we live and work.

One of the biggest challenges for African nations will be creating enough jobs
for their rapidly growing populations. Africa’s working-age population is set to
grow from 1 billion in 2019 to 2.4 billion by 2050 and ensuring there are
enough jobs is going to be difficult. While technology is promising to drive
growth across the continent, there’s a danger it will also take jobs away from
people, meaning Africa needs to find the right balance between
maximising efficiency and creating job opportunities.

Earlier this year, President Cyril Ramaphosa, speaking at a conference at the

University of Johannesburg where business, academia and civil society
reflected on the past and the next 25 years of democracy, warned South
Africans to brace themselves for mass job losses to technology with the

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implementation of the 4IR. As technology advances, more jobs will be
automated, limiting the need for human input. It is not surprising to see the
latest unemployment rate released by Statistics South Africa rising to 29.1 %
in the third quarter, the highest it has been since the launch of the Quarterly
Labour Force Survey 11 years ago.

It is also bringing new technologies which process information faster, helping

to speed up health services, improving agricultural outputs and creating new
jobs which didn’t exist 20 years ago.

However, critics hit out at the level of automation, robots and computers
performing so many human jobs, because many jobs are disappearing. For
example, the South African banking sector is digitising operations in pursuit of
ways to lower costs by maximising online banking and minimising face-to-face
banking. It has recently been reported that Standard Bank has closed 91
branches and retrenched 1 200 workers and Nedbank is in talks with 1 500
employees over potential job cuts. Further, MultiChoice Call Centre downed
tools in protest over 2 194 planned job cuts. MultiChoice said this was to roll
out new automated technologies and that the “realignment” was in response
to the “changing behaviour of its customers”, who were increasingly “moving
away from traditional voice calls and visits to walk-in centres and adopting
new self-service and digital technologies to engage with the company”.

Earlier this year Communications Minister Stella Ndabeni-Abrahams, speaking

at Uber's Tech4Safety Summit, said South Africans should embrace
technological advancements and not fear losing jobs because of the 4IR,
adding that one of the responsibilities of her department was to create an
enabling environment for the industry to make sure that 20 million
unconnected people are connected to WiFi.

For South Africa to benefit from the revolution it must upskill and reskill
current employees to ensure they remain relevant in the workplace, bring
young people online and reduce the cost of data as mobile prepaid data prices
in South Africa are the highest when benchmarked against other African
countries, according to the Competition Commission.

Meanwhile, the National Economic Development and Labour Council (NEDLAC)

published a report on the future of work in South Africa and concluded that
there is a pressing need for education from pre-school level to postgraduate
level to be "re-imagined". The education programme in South Africa must

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 incorporate emerging skills requirements with a particular emphasis placed on
lifelong learning.

Professor Tshilidzi Marwala, of the University of Johannesburg, is also deputy

chairman of the Presidential Commission on the Fourth Industrial Revolution.
He agrees with the NEDLAC report, writing that it is vital for African countries
to collectively create a few elite institutions that will drive the African continent
into the 4IR. These elite institutes should not be limited to higher education
only but must also focus on primary and secondary education. For
South Africa to benefit it needs multi-disciplinary education that capacitates
its people with the required skills sets to tackle the challenges posed by the
4IR.

One of South Africa’s challenges continues to be the shortage of

physical infrastructure in the rural areas, access to the internet, high data
costs and unskilled labour, all of which will make the 4IR difficult to implement.
Like it or not, 4IR is here to stay and it is disrupting industries across
South Africa. How South Africa manages the disruption is key to the survival
of the economy and employment.
Source: Tshwari, L. 2019. The Fourth Industrial Revolution’s impact on South African jobs. Polity.
Online]. Available from: https://www.polity.org.za/article/the-fourth-industrial-revolutions-impact-on-
south-african-jobs-2019-10-31. [Accessed: 2023-01-23].

Briefly discuss how South Africa can advance employment saving and creating
technical progress in the era of the 4IR. Include definitions for the three types of
technical progress in your discussion. (10)

Answer:
Technological change alters the manner in which inputs are used to generate
output, and it results in a larger amount of output being generated from a fixed
amount of inputs. Let us assume that we are dealing with two inputs, capital and
labour. The new technology may be factor neutral; that is, it results in the same
relative amounts of capital and labour being used as before the technology
changed (at constant factor prices). However, smaller amounts of inputs are used
per unit of output. On the other hand, the new technology might be labour-saving
in nature. In this instance, fewer factor inputs are required per unit of output,
but the relative amount of capital used rises at constant factor prices (i.e., the
K/L ratio increases). Finally, the technological change could lead to a decrease
in the K/L ratio at constant factor prices. In this instance, we say that the
technological change is capital-saving.

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African countries can advance employment saving and creating technical
progress by:

• Augmenting labour and capital production techniques. That is, there

should be no complete capital or labour-oriented production.
• Rise tax on technological goods to redistribute to affected industries.
• Create skill advancing centres for employees to adapt to new required
skills.
• Create new industries to enable further economic opportunities. For
example, tellers can be employed in the production hub of self-serving till
machines.
• Coordinate technological development at national and international level
to ensure job saving and employment creation.
• Establish technical advancement regulatory institutions to ensure
technical progress raises social welfare through further employment and
job saving.
• Expand technical progress in other sectors of the economy and regions of
the world to ensure just, fair and sustainable technical progress.

Question 4 (20 marks)

Read the scenario below and answer the questions that follow:

The market for London cologne in a small country is characterised by the

following demand and supply relation:

𝑄𝑑 = 1 800 − 0.1𝑃 and 𝑄𝑠 = 0.4

Where:

P, Q > 0.

The international price of a London cologne is R2 500, and the South African
government decides to impose a 10% tariff on all cologne imports.

4.1 Illustrate the above market. (5)

4.2 Which agents of society are losers and gainers? Showing all calculations,
calculate their losses and gains from the imposition of a tariff. (10)

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4.3 Briefly explain any two (2) invalid arguments for interventionist trade
policies. (5)

Answer: Dear Student: 'There was an error on the supply equation, it read Qs =
0.4 instead of reading Qs = 0.4P. The marking has been adjusted have been
adjusted accordingly. However, below is the correct solution with the correct
equation.

4.1

4.2
Losers: consumers lose 384 375 of the consumer surpluses.
Trade volume decreases from 550 to 425 import volume.
Deadweight/societal loss is 15 625.
Winners: government receives revenue of 106 250.
Producers’ surpluses increase by 12 750.

4.3
• Mercantilist approach of accumulation.
• ‘Level the playing field’ approach.
• Local producer’s ‘right to the market’ argument.

TOTAL MARKS: 50

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