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ECS 3702 Exam Pack
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The proof of the pudding is in the eating, simplicity is the best
Paper November 2017
Question 1
An appreciation of the rand against the US dollar, will result in increased South African imports
from the US, this is because fewer Rands can now purchase more US dollars, implying that South
Africans now find it cheaper to buy US goods.
Question 2
One of the possible effects of a recession in South Africa, on its trade with SADC member states
is, widening of South Africa’s trade deficit, which implies that South Africa is exporting less and
thus less employment opportunities, and dampened aggregate demand.
Question 3
You are told that in 2016, South Africa’s exports to the rest of the world totaled 300 billion dollars,
while its exports in the same year amounted to 650 dollars. From this statement, you deduce that,
South Africa experienced a current account deficit in 2016.
Question 4
Differences between countries in terms of opportunity costs results in countries acquiring,
comparative advantage. A country with less opportunity cost does have a comparative advantage
in the particular product over the other country.
Question 5
The reason why relative costs differ between countries is because, countries have different relative
factor endowments.
Question 6
Should South Africa impose a tariff on imports from Japan, this will cause domestic production to
rise, domestic consumption to rise and imports fall. The answers I guess they are wrong.
Question 7
Which of the following statements is correct regarding the effect of imposition of an import tariff and
a quota on domestic price and domestic production, an import tariff raises the domestic price of the
good and the domestic production levels, and a quota raises the domestic price and domestic
production.
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,Question 8
The amount that consumers actually pay for 200 units of goods T is R1 200.
Question 9
The total consumer surplus, in the absence of an import tariff and at Pt = R6, ½*
base*height,1/2*200*4 = 400.
Question 10
South Africa has emerged as a source of outward foreign direct investment on the Africa continent.
One of the benefits to recipient African countries, of South Africa investment is increased
employment in the African countries.
Question 1 (b)
1.1 the European union is an example of a customs union, TRUE A customs union allows no tariffs
or other barriers on trade among members (as in a free trade area), and in addition it
harmonizes trade policies (such as the setting of common tariff rates) toward the rest of the
world. The most famous example is the European Union (EU), or European Common Market,
formed in 1957 by West Germany, France, Italy, Belgium, the Netherlands, and Luxembourg.
1.2 One of the ways a country can reduce its balance of payment deficit is to place restrictions
such as tariffs and quotas on international trade, TRUE.
1.3 There are seven SADC member states, FALSE The 14-member Southern Africa Development
Community (SADC), extending from Angola, Botswana, the Democratic Republic of Congo,
Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland,
Tanzania, Zambia, and Zimbabwe.
1.4 The implication of the factor price equalization theory is that free trade will cause equalization
in prices of identical factors across countries, TRUE. International trade will bring about
equalization in the relative and absolute returns to homogeneous factors across nations. As
such, international trade is a substitute for the international mobility of factors.
1.5 If leather, used as an input in the production of leather boots is taxed, while imported leather
boots are not taxed, this will cause the effective rate of protection to be negative (CHECK
PRESCRIBED TEXT)
Question 2
(a) Briefly define or explain H-O theory (5)
According to the prescribed text, Heckscher–Ohlin theorem is a theory that suggests that a nation
will export the commodity whose production requires the intensive use of the nation’s relatively
abundant and cheap factor and import the commodity whose production requires the intensive use
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,of the nation’s relatively scarce and expensive factor. In short, the relatively labor-rich nation
exports the relatively labor-intensive commodity and imports the relatively capital-intensive
commodity.
In terms of our previous discussion, this means that Nation 1 exports commodity X because
commodity X is the L-intensive commodity and L is the relatively abundant and cheap factor in
Nation 1. Conversely, Nation 2 exports commodity Y because commodity Y is the K-intensive
commodity and K is the relatively abundant and cheap factor in Nation 2 (i.e., r/w is lower in Nation
2 than in Nation 1).
(b) Community indifference curve (5)
The curve called community indifference curve, shows different combinations of two commodities
that yield equal satisfaction to the community or a nation. The community indifference curves do
have the same characteristics as the indifference curves we studied in the previous modules, which
states that higher community indifference curves, illustrate greater of higher satisfaction compared
to the one below.
One another characteristic as explained by the definition, the same points on the community
indifference curve gives the same level of satisfaction. In addition, the indifference curves are
convex to the origin, showing a negative slope. Lastly, we know that the indifference curves are
many, and only a few are illustrated in an indifference map. Important to take note is that,
indifference curves, in an indifference map do not cross. If it happens that they cross the first
characteristic of saying a higher indifference curve gives a higher satisfaction as compared to the
one below is violated.
All these characteristics will be illustrated using the diagram below, where we say, point N and A,
on the same indifference curve I, gives the same level of satisfaction, however, point T and H, gives
a higher level of satisfaction, as well as point which gives a higher level of satisfaction compared
to T and H, N and A.
One last important characteristic of the community indifference curves is the marginal rate of
substitution. The concept of marginal rate of substitution suggests that in its consumption patterns,
a nation should sacrifice one unit of the other commodity to gain another unit of the second
commodity and remain on the same indifference curve. Salvatore (2013) defined marginal rate of
substitution as is the amount of Y that a nation could give up for one extra unit of X and remain on
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, the same indifference curve. As shown in the diagram below, the marginal rate of substitution gives
the absolute slope of the community indifference curve at the point of consumption and declines
as the nation moves down the curve. According to Salvatore (2013), this decline in marginal rate
of substitution shows that, the more X the country consumes and less of Y the nation consumes
the more valuable commodity Y becomes as compared to X.
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