this document contains ECS3702 ASSESSMENT 2 OF 2024 EXPECTED QUESTIONS AND ANSWERS (INCLUDING ALL GRAPHS ). USE IT AS A ROUGH GUIDE TO CREATE YOUR OWN AND SCORE ABOVE 75%
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QUESTION 1
(ii) From your answer in (i) above, explain whether trade is possible and explain the
pa ern of trade according to the theory of absolute advantage.
[4 marks]
According to the theory of absolute advantage, countries should specialize in producing the goods in
which they have an absolute advantage. In this case:
Unos has an absolute advantage in producing cellphones.
Tres has an absolute advantage in producing candles.
The pa ern of trade would be as follows:
Unos would specialize in producing cellphones and export them to Tres.
Tres would specialize in producing candles and export them to Unos.
By specializing in their respec ve areas of exper se, both countries can produce more of each good than
they could if they were to produce both goods domes cally. This specializa on and trade would lead to
increased efficiency and higher overall produc on for both countries
(iii) Determine the commodity of each na on’s compara ve advantage and disadvantage. No marks
will be awarded if you do not show your workings. [6 marks]
1. Unos:
o To produce 1 ton of cellphones, Unos must give up 6/18 = 1/3 ton of candles.
o To produce 1 ton of candles, Unos must give up 18/6 = 3 tons of cellphones.
2. Tres:
, o To produce 1 ton of cellphones, Tres must give up 8/6 = 4/3 tons of candles.
o To produce 1 ton of candles, Tres must give up 6/8 = 3/4 tons of cellphones.
Iden fying Compara ve Advantage:
Unos: Has a lower opportunity cost in producing cellphones (1/3 ton of candles) compared to
Tres (4/3 tons of candles).
Tres: Has a lower opportunity cost in producing candles (3/4 ton of cellphones) compared to
Unos (3 tons of cellphones).
Conclusion:
Unos has a compara ve advantage in producing cellphones and a compara ve disadvantage in
producing candles.
Tres has a compara ve advantage in producing candles and a compara ve disadvantage in
producing cellphones.
(iv) From your answer in (iii) above, explain whether trade is possible and the pa ern of trade
according to the theory of compara ve advantage.
Yes, trade is possible based on the theory of compara ve advantage.
According to the theory of compara ve advantage, countries should specialize in producing the goods in
which they have a compara ve advantage. In this case:
Unos has a compara ve advantage in producing cellphones.
Tres has a compara ve advantage in producing candles.
The pa ern of trade would be as follows:
Unos would specialize in producing cellphones and export them to Tres.
Tres would specialize in producing candles and export them to Unos.
By specializing in their respec ve areas of exper se, both countries can produce more of each good than
they could if they were to produce both goods domes cally. This specializa on and trade would lead to
increased efficiency and higher overall produc on for both countries, even if one country has an
absolute advantage in producing both goods
Assume that Unos is a capital-abundant country and Tres is a labour-abundant country.
Assume they produce two goods, candles which are labor intensive in their produc on
and cellphones which are capital-intensive in their produc on. Answer the following
ques ons. OSCAR THE TUTOR
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, (i) In which country will the rela ve price of cellphones be lower? Explain. [2 marks]
The rela ve price of cellphones will be lower in Unos.
This is based on the Heckscher-Ohlin Theorem. This theorem states that a country will export the good
that is intensive in its rela vely abundant factor. In this case:
Unos is capital-abundant.
Cellphones are capital-intensive.
Therefore, Unos will have a lower rela ve price for cellphones compared to Tres. This is because Unos
has a rela vely abundant supply of capital, which is the factor used intensively in cellphone produc on.
As a result, the cost of producing cellphones will be lower in Unos.
(ii) Explain briefly what happens in both countries to (a) the produc on of candles and cellphones 3 (b)
the demand for labour and capital (c) the wage and interest rate and (d) the pre-trade differences in
wages and interest rates as trade occurs. [8 marks]
(a) Produc on of Candles and Cellphones
Unos (Capital-abundant):
o Cellphones: Increases produc on due to compara ve advantage.
o Candles: Decreases produc on as resources shi to cellphone produc on.
Tres (Labor-abundant):
o Candles: Increases produc on due to compara ve advantage.
o Cellphones: Decreases produc on as resources shi to candle produc on.
(b) Demand for Labor and Capital
Unos:
o Labor: Demand increases as produc on of candles decreases and demand for labor-
intensive goods increases.
o Capital: Demand increases as produc on of cellphones increases and demand for
capital-intensive goods increases.
Tres:
o Labor: Demand increases as produc on of candles increases and demand for labor-
intensive goods increases.
o Capital: Demand decreases as produc on of cellphones decreases and demand for
capital-intensive goods decreases.
(c) Wage and Interest Rate
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