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ECS3702 JULY 2021 EXAM MEMO DESIGNED TO CATER FOR OCT/NOV 2021 ONLINE EXAMS
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- University Of South Africa (Unisa)
ECS3702 JULY 2021 EXAM MEMO DESIGNED TO CATER FOR OCT/NOV 2021 ONLINE EXAMS
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Question 1(a)
Absolute advantage exists when one nation is more efficient than another in the production of
one commodity while absolute disadvantage is when that same nation is less efficient in the
production of a second good or commodity than the other nation.
Scenario A:
South Africa has an absolute advantage the production of gold (it produces 8 tons per
hour as compared to the 2 ton/hr of Namibia).
In the production of gold, Namibia thus has an absolute disadvantage.
In Fish, South Africa has an absolute disadvantage while Namibia has an absolute
advantage (It can produce 4 tons per hour compared to 2 tons per hour by South Africa.
Scenario B
South Africa has an absolute advantage in the production of both goods(both numbers
higher) mention the numbers
Namibia has an absolute disadvantage in both goods (both numbers less).
(b)
Scenario A
South Africa Namibia
Gold [ton/hr] 𝟐 𝟒
8 [𝟖 = 𝟎. 𝟐𝟓] 2 [𝟐 = 𝟐]
Fish [ton/hr] 𝟖 𝟐
2 [𝟐 = 𝟒] 4 [𝟒 = 𝟎. 𝟓]
Scenario B
South Africa Namibia
Gold [ton/hr] 𝟒 𝟐
8 [𝟖 = 𝟎. 𝟓] 4 [𝟒 = 𝟎. 𝟓]
Fish [ton/hr] 𝟖 𝟒
4 [𝟒 = 𝟐] 2 [𝟐 = 𝟐]
, According to the law of comparative advantage, even if one nation is less efficient than the
other nation there is still a basis for mutually beneficial trade through specializing in producing
the good with the smallest disadvantage.
Scenario A,
South Africa has a comparative advantage in the production of gold mention the
numbers
Namibia has a comparative disadvantage in gold because it has to sacrifice 2 tons of
fish to produce the same ton of gold.
Namibia has a comparative advantage in the production of fish (mention the numbers)
South Africa’s comparative disadvantage lies in fish as it gives (mention the numbers)
Scenario B
Case of equal advantage as the opportunity costs in both countries are exactly the same.
In order to produce a ton of gold, both countries have to give up 0.5 fish and to produce
a ton of fish, both countries give up 2 tons of gold. In this case, no mutually beneficial
trade can take place. (rephrase)
(c)
The classical theory says that :
1. Trade based on absolute or comparative advantage is mutually beneficial (the gains
from trade) and that
2. A country will export goods in which it has such an advantage and import goods which
can be produced more efficiently by other countries (the pattern of trade). This pattern of trade
is determined by the differences in relative commodity prices between nations.
In Scenario A, trade based on Absolute advantage is possible. South Africa should specialize
in the production of gold and import fish from Namibia. Trade based on comparative advantage
is still possible as well, since soth Africa has a comparative adavatanage in Gold and Naimibia
in fish, South Africa should produce gold while Namibia produces fish and then they would
trade. (rephrase)
In scenario B, trade based on absolute advantage is not possible. South Africa is better at
producing both goods, hence according to Smith, there exists no basis for trade. Based on
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