International Trade

ECO2ITR – International Trade Semester 2 – 2023 Individual Assignment (PART 1) Due date: 23.59 Sunday 27 August 2023 (Week 4) Part 1 of this assignment carries 10% of the total mark of the subject Mark description: This assignment is marked out of 10, which corresponds to 10% of the overall assessment mark for this subject. Marks within questions are distributed according to the detail provided. Please answer all questions. Submission: Following University regulations, late submission will incur a 5% penalty each day after the due date. Submission will not be accepted if the assignment is 5 or more days overdue. Please check the following link for more information: Assessment Policy / Document / La Trobe Policy Library If you are unable to submit on time and you fulfill the eligibility requirements, please apply to special consideration following the official University procedure: https://www.latrobe.edu.au/students/admin/forms/special-consideration. Question 1 – Ricardian Model of Trade 7 marks (2+3+2) Suppose two economies Home (H) and Foreign (F) produce two goods, bread and wine, with only one production factor: labour. Production technology, expressed as unit labour requirement (𝑎𝑎𝐿𝐿 ), is given in the following table: Bread Wine Home 6 12 Foreign 4 2 Suppose that Home and Foreign have 2400 and 1800 units of labour respectively. Also assume that both countries are free to trade, and the world relative price of bread is 1. a. (2 marks) Use the Ricardian Model to explain the pattern of specialisation and trade that is expected between these two countries. Support your written answer with the use of graphs. b. (3 marks) Use the Ricardian Model to assess the impact of trade on these countries’ national welfare. Support your written answer with the use of graphs. c. (2 marks) What are the insights provided by the Ricardian Model regarding the impact of trade on the distribution of income within each of these countries? Briefly explain why. Question 2 – Ricardian Model of Trade and Trade Wars 3 marks Please check the fragment below extracted from the article “Briefing: Trade war, a primer”, IPE Magazine, 2019. In this fragment the author states that “It is impossible to win a trade war”. (3 marks) Indicate whether you agree or disagree with this statement and use the Ricardian Model to briefly justify your answer. “Briefing: Trade war, a primer By Peter Kraneveld January 2019 (magazine) Protectionism is becoming more widespread despite the benefits of free trade being understood for more than two centuries Key points • • • • Ricardo’s theory of comparative advantage shows that all countries can benefit from trade Trade is not a zero-sum game The US has lost more than it has won from the Trump administration’s recent tariffs On a microeconomic level there will be winners and losers from the increase in tariffs In 1817, David Ricardo’s ‘On the Principles of Political Economy and Taxation’ was published. In this classic text, he showed trade between two countries can be profitable for both nations, even when one country can make all its goods more cheaply. Ricardo’s theory of comparative advantage has been refined over the past century but it remains widely accepted among economists. Several conclusions follow from the theory. First, trade is not a zero-sum game. Less trade is a lose-lose proposition for everyone. Therefore, when US President Donald Trump claimed that a trade war is easy to win, he showed that he is badly advised, ignorant to the benefits of trade, or both. It is impossible to win a trade war. (…)” Fragment copied on 31/07/2023 from: https://www.ipe.com/briefing-trade-war-a-primer/10028808.article