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Econ 244International Trade
QUESTION 1
What are two shortcomings of the technological gap model? [2]
1. Does not explain technological gap or imitation gap in a precise manner
2. Fails to explain why technological gap arises and how it is eliminated over time
Using insights from the product cycle model, explain why high-income, labour-saving products are
often developed in wealthy countries. [3]
• Product is initially produced and exported by innovating country but finally ends up as an
importing country of the same/similar (homogenous) product
1. Producers in capital-rich countries initially introduce new products
2. Innovating firms have monopolistic advantage
3. Need + opportunities of domestic market stimulate innovation of new product
4. Innovating firm has little info about conditions in foreign market
5. Home environment is different to other advanced economies
6. May be triggering event e.g. appearance of rival producers → need to export production
QUESTION 2
What is the basis for comparative advantage under the Hecksher-Ohlin (H-O) model? How does
this differ from Ricardo’s theory of comparative advantage? [2]
The H-O model predicts a capital-abundant country will export capital-intensive goods while the
labour-abundant country will export labour-intensive goods. This is different from CA because CA
analyses opportunity cost as the basis for trade, while H-O model analyses specialisation and inter-
industry trade for the basis of trade. Assume a particular country has a relative abundance of natural
resources.
Describe a practical example of goods that this country will tend to export, according to the
Hecksher Ohlin model. [2]
Abundance of natural resources: will probably be exporting produce, raw materials. Due to inter-
industry trade, they will probably be importing manufactured goods
,What is the trade pattern that will arise if the country in the previous question follows the
Hecksher-Ohlin model? [1]
Inter-industry trade pattern
QUESTION 3
In May 2018, Mr Trump imposed a 25% tariff on steel imported into the United States of America.
Use an appropriate graph to illustrate and explain what the impact of the tariff will be on the
importing country. [8]
THE IMPORTING COUNTRY: intuitively, the exporters (those bringing their goods to USA) will be
disadvantaged because it will cost them 25% more to sell their goods to the USA (meaning their
goods are going to be 25% more expensive to sell in USA than the domestic producers’ goods)
Name two other protectionist measures Mr Trump could have used instead of tariffs. [2]
• Import and export quotas
• Subsidies for domestic producers
• Import licenses etc.
, QUESTION 1 (trade continued)
The new South African Minister of Trade and Industry and Economic Development invites you to
write an essay in which you explain David Ricardo’s Theory of Comparative Advantage with the aid
of a graph, emphasising the gains from trade. He also wants to know what policy advice one can
derive from this theory
Look at https://www.khanacademy.org/economics-finance-domain/apmacroeconomics/basic-
economics-concepts-macro/scarcity-and-growth/a/lesson-summarycomparative-advantage-and-
gains-from-trade if you are wanting a concise explanation of CA.
Comparative Advantage: even in the absence of a country’s absolute advantage in any of the two
commodities, trade can still be favourable in a comparative advantage scenario. A country has
comparative advantage if they can produce at a lower opportunity cost than another country (they
forego less to produce that good than the other country would).
The assumptions:
• 2 countries, 2 commodities
• Labour is the only factor of production
• Technology doesn’t change (no innovation)
• There is full employment in both countries before and after trade
• Perfect competition
• Constant returns to scale
• Free trade: no restrictions on imports and exports
• No transport costs
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