QUESTION 1

a) Consider a South African citizen visiting New Zealand for the ongoing cricket ODI series. This individual buys an online ticket for the match from the website before leaving and watches the match live in Eden Park, Auckland. While there, he gets a call from his office to attend a business meeting the next working day before returning back to South Africa. 

Based on this information, analyze the different modes of Trade in Services that would result from the transactions and activities of this individual. 

b) Why are common borders and cultural similarities often an additional factor to determine who trades most with whom and why? Use your knowledge of the gravity model to justify your answer through two suitable examples.

QUESTION 2    

Consider a two-country Ricardian trade model with 3000 hours of labour in NZ and 500 hours of labour in UK. They can each produce two goods, Cheese and Cars. In NZ, 25 hours of labour is required to produce 1 kilogram of Cheese, while 2000 hours are required to produce a Car. In UK, a Car requires 50 hours of labour to produce while a kilogram of Cheese takes 25 hours of labour to produce.

a) Graph the PPF (Production possibility frontier) for both NZ and UK, stating all assumptions that help determine the shape of the PPF.

b) Does NZ have an absolute advantage in production of any good? Explain.

c) What would be the relative supply of Cars in the world market, if both NZ and UK were to produce these two goods on the basis of their comparative advantage in production? 

d) Assuming that the equilibrium relative price of Cars is equal to 10 in the world market, graph the equilibrium relative price, demand and supply of cars in this model. State all assumptions that help determine the shape of the relative supply curve for cars.

QUESTION 3  

Consider a two country world (US and China) with only one factor of production, i.e. labour, and assume they both can produce 5 goods with the unit labour requirements provided in the table below:

Good US 

Unit labour requirement (uLi) China 

Unit labour requirement (uLi*)

Cars 6 50

Computer 7 63

Books 9 45

Toy 75 15

Cellphones 60 10

a) If the relative wage (w/w*) for US is 6, then which goods will be produced and exported by US and China respectively, and why?

b) If the relative wage (w/w*) for US decreases to 5 due to productivity changes, which country would now be the exporter of books, and why?

QUESTION 4   

Given:

Assume that you are working in an automobile factory in your country that uses workers (labour) like yourself and capital to produce cars, and that this capital cannot be moved to cheese production that requires land and labour, but no capital. Only two goods, cars and cheese can be produced with these resources.

Required:

If relative prices of cheese were to increase in your country, what would be the impact on workers such as yourself and capital owners in your country, and why? Illustrate your answer by an appropriate diagram, applying your knowledge of the Specific-Factors model. Remember to state all assumptions behind this model.

QUESTION 5

In the previous question, if your country is more land abundant and you open up to trade with a capital abundant country, your country will be specializing in producing and exporting cars and capital owners income will increase. True or False? Justify your answer applying your knowledge of the Heckscher-Ohlin Theorem.