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International Trade and Enterprise

Question 1 ( 7 marks)

The Gravity Model 

“The gravity model of international trade is able to predict trade flows between two countries based on two principal factors.”

Describe the gravity model – specify the variables, use an example of Canada and the USA, or Mexico and the USA – both situations where the gravity model has been found to be accurate. 

Question 2 (7 marks)

Absolute and Comparative Advantage

Assume a world of two nations USA and The two nations produce machinery and agriculture. The USA can produce 160 units of machinery or 200 units of agriculture while Australia can produce 140 units of machinery or 50 units of agriculture, in the same time period.

Define “absolute advantage” (1 mark)
Which country, Australia or USA, has an absolute advantage in the production of agriculture and machinery? Explain the basis for your answer (3 marks)
Which country – Australia or USA – has a comparative advantage in production of machinery and agriculture? Define comparative advantage and explain how it applies in this example. (3 marks)

Question 3 (7 marks)

The Standard Model

The Standard Model of Trade is a general model that accommodates other models which reference  specific sources of comparative advantage, e.g. Ricardian model (differences in labour effectiveness) and Heckscher–Ohlin model (references ‘factors of production’).

There are four key relationships upon which the Standard Model is based. Please list each of the four relationships and give one example for each.

Question 4 (7marks)

Controversies in Trade Policy

After the Seattle 1999 World Trade Organization (WTO) Ministerial Conference, in the  next two years, large anti-globalization demonstrations rocked the International Monetary  Fund and World Bank in Washington.

Describe the role of WTO with respect to the following 7 aspects: knowledge of WTO/GATT, fostering trade liberalization, abolishing tariffs, increasing transparency, seeking resolutions, improving communication within trading blocs, controlling export subsidies, improving national welfare and competitiveness of developing countries (1 mark each)


Question 5 (11 marks)

Instruments of Trade Policy 

Evaluate the effects of an import tariff by the government of a small country. Explain in detail the effects of an import tariff on the economic welfare of the small country. (6 marks)
Describe the potential advantages to the economy if the government offers an export subsidy (5 marks)


Question 6 (11 marks)

Different market structures

Assume you are graduating from Holmes Institute and that you want to begin a business in Australia. You are aware that there are four different market structures and that some structures are hostile to new products and services. You decide upon Australia as a location for an Asian fast-food theme restaurant because you have expertise in that sector and you believe that it will be popular. You have also considered the four market structures: perfect, monopolistic, oligopoly and monopoly competition. You decide on one of the structures.

Describe each of the four market structures and explain how each one may be conducive to starting your new Asian themed small business. (8 marks)
Suppose you start your business within a monopolistic market structure. How is that structure advantageous to your proposed business and how would it affect the future growth of your business? (3 mark)


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