ECS3702 Assignment 02, Semester 2, 2022

Assignment is available from: Monday, 22 August 2022, 8:00 AM

Assignment closes on: Friday, 2 September 2022, 11:00 PM

Instructions:
• You must complete your answers in the lines/ spaces provided. You are not
allowed to write on external paper.

• All questions are compulsory

• The assignment is 100 marks

• There are 12 pages in this assignment.

QUESTION 1

Globalisation has increased the interdependence between nations globally. The

coronavirus pandemic has had significant immediate impacts on all economies.
Discuss the potential trade effects and subsequent channels through which the pandemic
has affected a developing economy such as South Africa. [5 marks]
QUESTION 2

Consider the following hypothetical scenario of two countries, Ivory Coast and Malawi.
Assume the following:

• There are two products, oil and maize.

• Consumers in both countries desire both goods
• The goods are homogenous (consumers in either country cannot differentiate
between oil and maize from either country)
• Labour is the only factor of production available in both countries

Table 1: Worker hours per good

Good Country
Ivory Coast Malawi
Oil (barrel/hr) 1 2
Maize (barrel/hr) 4 1

(i) Assume Zambia and Senegal each have 100 worker hours, illustrate using a similar
table as above, the output of each product that is produced by each country.

In other words, if you have 100 hours of labour and good A requires 1 hr of labour to
produce 1 unit, how many units of good A can be produced using the 100 hrs etc?
[4
marks]

(iii) Using the figures indicated in your answer in (ii) above, illustrate the quantities each
country can produce on its own in a production possibility frontier (PPF) [5 marks]
QUESTION 3

Use the table below to answer the questions that follow

Output Kenya Lesotho
Tea (ton/hr) 8 2
Wool (ton/hr) 6 4

(i) Identify the commodity in which Kenya and Lesotho have an absolute advantage
and absolute disadvantage. Explain your answer. [4 marks]

(ii) Indicate and explain the commodity of each nation’s comparative advantage
and disadvantage. No marks will be awarded if you do not show your
workings. [4 marks]
(iii) If Kenya exchanges 8T for 8W with Lesotho,

(a) How much does Kenya gain in terms of wool? And how many hours does Kenya
save? Explain [2 marks]

(b) How much does Lesotho gain in terms of Wool? Explain [2 marks]

(c) What is the range of mutually beneficial trade? Explain [3 marks]

QUESTION 4
In a conversation about classical trade theories, your course mate says, “If Mauritius is
better than Zimbabwe at producing Salt and Coal, then Mauritius is better off not trading
with Zimbabwe”.
Write a well thought out and argued response to your course mate by evaluating the validity
of the statement made. [10 marks]
QUESTION 5
The basis for international trade rests on the different factor endowments that exist between
countries. State the theory from which this statement derives and using well drawn
diagram(s), explain fully the theory you have stated. NB: all assumptions and criticisms
must form part of your discussion. [25 marks]
QUESTION 6
Chillerston is a small country, importing steel. In the absence of trade, steel is bought and
sold at R6 per ton and the country consumes and produces 60 tons of steel. The free trade
price of steel is R2.
Represent this scenario in a well-drawn diagram and explain with the aid of the diagram,
the impact of a 50 percent ad-valorem tariff on steel. [10 marks]
QUESTION 7

(i) Compute the total consumer surplus in the absence of the tariff. [3 marks]
 (ii) Compute the consumer surplus after the tariff. [3 marks]

(iii) Compute the producer surplus [3 marks]

v) Ghana is one of the world’s top producers of cocoa. Calculate the effective rate of
protection when the nominal tariff rate on chocolate bars is 40 percent, the ratio of the
cost of imported cocoa to chocolate bars (in the absence of a tariff) is 0.5 and the nominal
tariff on cocoa powder is 40 percent.
[3 marks]
QUESTION 8
Foreign direct investment is a crucial source of finance for economic development
especially in developing countries. The following questions are based on the article by
Elizabeth Asiedu, embedded below.

the determinants of
FDI in SSA. Asiedu.p

If you cannot open the file, do a google search for the following:

Asiedu, E. (2002) “On the Determinants of Foreign Direct Investment to Developing

Countries: is Africa Different?” World Development, Vol 30, No 1, pp 107-119.

(i) According to Asiedu (2002), what are some of the benefits that make FDI a
significant source of finance to SSA? [4 marks]

(ii) What are the reasons why SSA has had to rely on external capital flows such
as FDI? [3 marks]
 (iii) What are the factors that determine FDI inflows to SSA [3 marks]

(iv) Discuss briefly, the differences and reasons for the differences between SSA and
Non-SSA countries experience of FDI inflows [4 marks]

END