First Examiner: Dr K Amusa
Second Examiner: Mr C Leotlela
External Examiner: Prof T Greyling
,QUESTION 1A.
Define/explain the following terms:
(i) Mercantilism. [1 mark]
(ii) Gains from trade. [1 mark]
(iii) Intra-industry trade. [1 mark]
(iv) Ad-valorem tariff. [1 mark]
(v) Free trade area. [1 mark]
QUESTION 1B.
Consider the following hypothetical information for two countries Sunveld and Moonveld and
answer the questions that follow.
Goods (output per hour) Sunveld Moonveld
Keyholders (tons/hr.) 1 5
Smart Tv (tons/hr.) 20 40
(i) Which country has an absolute advantage and absolute disadvantage in which
product(s)? Explain your answer. [4 marks]
(ii) Which country has a comparative advantage and disadvantage in which product(s)?
Show your workings and explain how you reached your conclusions. [6 marks]
(iii) Explain the pattern of trade from your answer in (ii) above. [2
marks]
(iv) If Moonveld’s keyholder output per hour were 2 instead of 5, how will your answers
in (i) and (ii) above change, if any? Show calculations where necessary. [8 marks]
[25]
, QUESTION 2 [25 marks]
QUESTION 2A.
Sunveld has two production sectors in its economy. Sunveld produces Smart TVs (capital
intensive) and Sorghum (labour intensive). Labour is employed by the producers of Smart TVs
and Sorghum.
Assume that the price of Smart TVs increases relative to the price of Sorghum. Explain who gains
and who loses from free trade if (i) factors of production are mobile between the two sectors of
production and (ii) factors of production are immobile between the two sectors of production.
[6 marks]
QUESTION 2B.
Explain what is meant by factor intensity reversal and why its existence would result in a rejection
of the Heckscher-Ohlin theory. [6 marks]
QUESTION 2C.
Assume that Sunveld is a capital-abundant country and Moonveld is a labour-abundant country.
Assume also that bread is a labor-intensive good, and computers are capital-intensive in their
production. Answer the following questions.
(i) In which country will the relative price of bread be lower? [2 marks]
(ii) Briefly explain your answer to (i) above. [3 marks]
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