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ECS3702 EXAM PACK 2023
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ECS3702 EXAMPACK 2023
QUESTIONS
AND ANSWERS
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Question 1a
Briefly Explain the Following terms
(a) Absolute Advantage
Absolute advantage is the ability of a country to produce a greater quantity of a good
or service with the same quantity of inputs per unit of time, or to produce the same
quantity of a good or service per unit of time using a lesser quantity of inputs, than
another entity that produces the same good or service.
(b) Factor Intensity
The relative importance of one factor versus others in production in an industry,
usually compared across industries. Most commonly defined by ratios of factor
quantities employed at common factor prices,for instance we say that commodity Y is
capital intensive if the capital–labor ratio (K/L) used in the production of Y is greater
than K/L used in the production of X.
(c) Export Subsidy
Export subsidy is a government policy to encourage export of goods and discourage
sale of goods on the domestic market through direct payments, low-cost loans, tax
relief for exporters, or government-financed international advertising. Export
subsidies are direct payments (or the granting of tax relief and subsidized loans) to the
nation’s exporters or potential exporters and/or low-interest loans to foreign buyers to
stimulate the nation’s exports.
(d) Customs Union
A customs union is generally defined as a type of trade bloc which is composed of a
free trade area with a common external tariff. Customs unions are established through
trade pacts where the participant countries set up common external trade policy (in
some cases they use different import quotas).
(e) Transfer Pricing
It is the price at which two related parties transact business between themselves. It
occurs when two related parties decide between themselves the transaction price,
and such parties may affect the price when unrelated parties transact.
Question 1b
Question Answer
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SECTION B: ANSWER ALL THREE QUESTIONS IN THIS SECTION.
QUESTION 2(a)
Assume that the current discussion in the country centers on reducing the flow of
Chinese apparel into South Africa to the debate “should the South Africa government
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decide to implement a limit on the importation of apparels from China, South Africa
apparel production would increase and the country will be better off”
(i) Define the effective rate of protection and explain why nominal tariff is
sometime considered to be deceptive in terms of protection accorded to domestic
producers. (5)
The effective tariff rate of protection is the percentage increase in domestic value
added per unit of output made possible by the tariff structure. It is a measure of the
total effect of the entire tariff structure on the value added per unit of output in each
industry, when both intermediate and final goods are imported.
Sometimes it is considered to be deceptive in terms of protection accorded to domestic
producers, because of the implication that to impose tariffs on both imported inputs
and the final products of the industry is self
defeating as the tariff on the imported inputs reduces the effective tariff protection on
the final goods.
(ii) Using the formula below, show that it is possible for the the effective rate of
protection to be (a) negative and (b) equal to the nominal tariff rate on the
consumers of the final commodity Formula for the effective rate of protection.
(5)
g=(t-aiti)/1-ai
where g = the rate of effective protection to producers of the final
commodity t = the nominal tariff rate on consumers of the final commodity
ai = the ratio of the cost of the imported input to the price of the final commodity in
the absence of tariffs
ti = the nominal tariff rate on the imported input
(a) Negative
If ti is 20%, therefore:
(b) Equal to the nominal tariff rate on the consumers of the final commodity
If ti is 10% instead
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QUESTION 2(b)
Unemployment is a major macroeconomic issues in South Africa and thus
employment creation is one of the country’s pertinent macroeconomic goals. The
minister of trade and industry, is considering tariffs or subsidies as possible trade
policy instruments to reduce unemployment in the country.
As a final year international economics student, you are requested to give a
presentation to the department of trade and industry and advise them on the
appropriate trade policy to adopt. Using correctly drawn diagrams and factual
information, explain the appropriate policy choice between a tariff and a subsidy.
(15)
A tariff is a tax imposed by a government on goods and services imported from other
countries that serves to increase the price and make imports less desirable, or at least
less competitive, versus domestic goods and services. The government's hope is that
the added cost will make imported goods much less desirable.
A subsidy or government incentive is a form of financial aid or support extended to an
economic sector generally with the aim of promoting economic and social
policy.Export subsidy is a government policy to encourage export of goods and
discourage sale of goods on the domestic market through direct payments, low-cost
loans, tax relief for exporters, or government-financed international advertising.
Export subsidies are direct payments (or the granting of tax relief and subsidized loans)
to the nation’s exporters or potential exporters and/or low-interest loans to foreign
buyers to stimulate the nation’s exports.
As a final year International economics student, the appropriate policy choice as a
remedy for reducing the level of unemployment is imposing a tariff. The levying of
tariffs is often highly politicized. The possibility of increased competition from
imported goods can threaten domestic industries. These domestic companies may fire
workers or shift production abroad to cut costs, which means higher unemployment
and a less happy electorate. The unemployment argument often shifts to domestic
industries complaining about cheap foreign labor, and how poor working conditions
and lack of regulation allow foreign companies to produce goods more cheaply.
Tariffs work by increasing the price of the import. Those higher prices give an
advantage to domestic products within the same market. They are used to protect a
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