SUPP ASSESSMENT International Trade and Enterprise final assessmeNt Trimester t1, 2021 Assessment Weight: Instructions: · All questions must be answered by using the answer boxes provided in this...

SUPP ASSESSMENT
International Trade and Enterprise
final assessmeNt
Trimestert1, 2021
Assessment Weight:    
Instructions:
· All questionsmust be answered by using the answer boxes provided in this paper.
· Completed answers must be submitted to Blackboard by the published due date and time.
Submission instructions are at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of knowledge of the key topics covered in this unit
            
        
Question 1
    (7marks)
The Gravity Model
1. “The gravity model of international trade is able to predict trade flows between two countries based on two principal factors.”
Describe the gravity model – specify the variables, use an example of Canada and the USA, or Mexico and the USA – both situations where the gravity model has been found to be accurate.
ANSWER: ** Answer box will enlarge as you type
The gravity model of international trade is a well known model, that has its form in traditional, and is useful in predicting trade which are bilateral and which flows based on the sizes of economy and the distance between the two respectfully. Many researchers, after doing suitable research, came to the point that the evidences which are overwhelming and tends to fall with distance. The Gravity Model is useful for the explanation. The model explains the interaction which takes place between two places can be determined by the help of the product got from the population of both the places., and are divided by the square of the distance which is there in between the two. The main implication of this model is that the distance is not the one and only determining factor present in the interaction which is being held between two cities. For example, the city Los Angeles is so large in size that it can provide a huge amount of force which is gravitational to the city of El Paso. Furthermore, the Gravity Model can also be useful when it comes to comparing of the attraction based on gravity or the gravitational attention, present between the two cities, two continents, and two states. The two main variables of the Gravity Model are the mass and the distance. As, the gravity force between two objects always depends on the masses of the two objects and are inversely proportional to the square of the distance between the two objects. The gravity model has shown its grand success in accurately predicting trade flows between different countries for a huge number of goods and services, but many scholars all over the world believed that there was no justification theoretically present for the equation of gravity. The gravity model is also helpful in estimating the pattern of the trade which is international. The USA and Canada have been great business partners for many years now. Starting from the year 1999 to the present date. In the year 1999, Canada imported billions of merchandises which helped the USA to account for much profit. The volume of this trade is perhaps not even surprising when one is considered and the countries share many of their similarities regarding economy and culture. Also, the auto pact which was resolved in the year 1965, there has always been a trend which is uninterrupted trade, which is culminating in the Canada-USA free agreement trade passed in the year 1988.
Question 2
    (7 marks)
Absolute and Comparative Advantage
2. AssumeaworldoftwonationsUSAandAustralia.Thetwonationsproducemachineryandagriculture. The USA can produce 160 units of machinery or 200 unitsof agriculture while Australia can produce 140 units of machinery or 50 units ofagriculture, in the same time period.
a. Define “absolute advantage” (1 mark)
b. Which country, Australia or USA, has anabsoluteadvantagein the productionofagricultureandmachinery? Explain the basis foryouranswer (3 marks)
c. Which country – Australia or USA - hasa comparative advantage inproductionof machinery and agriculture? Define comparative advantage and explain how it applies in this example. (3 marks)
ANSWER:
A) Scottish philosopher and economist Adam Smith introduced the concept of absolute advantage about trading in his book "Wealth of Nations".According to Adam Smith when an individual or firm or any country produces any kind of product better than its rivals, then the situation is called absolute advantage for that specific individual, firm or country. More specifically the absolute advantage refers to the superior capability of a party in terms of producing any specific product as well as at a lower cost than its competitors.
B) According to the above-mentioned situation, where the United States can produce 160 units of machinery and 200 units of agricultural products, while at the same time period Australia can produce 140 units of machinery and 50 units of agricultural products, it is very obvious that the United States has the Absolute Advantage in case of trading with Australia. Particularly in these two segments of production such as machinery and agricultural products. After considering every possible limitation of absolute advantage and its assumptions, it is crystal clear that the United States is producing more machinery in a particular time span than Australia, where here Australia is producing 140 units of machinery, United States is producing 160 units, which is 20 units more than the Australian production units. On the other hand, the United States is also producing 200 units of agricultural products which is 150 units extra than Australia's 50 units of agricultural products.Hence it is proven that the United States is better than Australia in both the production segments.SoitisveryobviousthatUnitedStateshastheopportunityofabsoluteadvantage.
C) If a nation is more successful than another at producing specific products, it should focus on the one for which it is internally most efficient and trade for the others. In this case, the United States is more efficient in agricultural production than machinery, United States produces more units in agriculture at a lower cost than machinery, where Australia is more efficient in producing Machinery rather than agricultural products. So both the nation should import their lesser productive goods or products and export the efficient ones. As the United States is better than Australia in both the production segment. So, the United States of America has a comparative advantage in importing machinery from Australia and exporting their agricultural products to them.
According to the British Economist David Ricardo, when a nation has the opportunity to produce any specific product or goods at a lower opportunity cost than its rival, then the nation holds the comparative advantage in trading. This comparative advantage theory is another example of a supporting or preferable theorem for free trading in the world.
In this example, United States holds the top privileges...