Answer all the questions below Question 1. (This question has two parts: a and b) Assume that the United States and Cambodia both have similar demand functions and similar taste preferences. The United States however is capital abundant while Cambodia is labour abundant. Assume that the two countries produce only two goods: capital-intensive cars and labour-intensive shoes. Currently, the two countries are in the process of negotiating a bilateral free trade agreement (FTA). Part (a) Use the concepts of supply and demand to illustrate the situation of bilateral trade between the United States and Cambodia before the creation of their FTA. Note that before the creation of the FTA, both the United States and Cambodia use import tariffs. How can the Heckscher-Ohlin model be used to explain the positions taken by capital owners and labour owners in each country vis-a-vis a USA-Cambodia FTA. Students are recommended to use graphs in their answer. [7 marks] Part (b) If an FTA between the United States and Cambodia is created, according to the HeckscherOhlin model what will happen to the total welfare of each country? Specically, use the concept of Production Possibility Frontier (PPF) to graphically show the changes in the welfare of both countries following the creation of their FTA. [5 marks] Question 2. (This question has two parts: a and b) Assume that Australia and Indonesia have the same labor supply and their Production Possibility Frontiers/Schedules are presented below. Figure 1 L . 100 Part (a) Given the PPFs/PPSs of Australia and Indonesia in Figure 1, according to Adam Smith what would be the patterns of trade between Australia and Indonesia? According to Ricardo, what would be the patterns of trade between Australia and Indonesia? Please show the condition for the price of rice in terms of cars in free trade such that both counties gain from it. [5 marks] Part (b) What will happen to the trade patterns in the following two scenarios? Scenario 1: in 10 years the population of Indonesia doubles while the population of Australia remains unchanged. Scenario 2: the only change in 10 years is that Indonesia can produce a car with an opportunity cost of1 unit of rice (hint: the maximum amount of cars that Indonesia can produce will then be 70 instead of 40). [7 marks] Page 3 of 9 Question 3 (This question has two parts: a and b) You need to read Article 1 \"New Zealand wins WTO aggeal over Australia apple ban\" to answer the questions below. Part (a) Given the information in the article, use the concepts of apple supply and demand for apply to illustrate the situation when Australia's restrictions were in place. Hint: you can assume that the world consists of two countries: Australia and New Zealand and the two countries can trade with each other. [6 marks] Part (b) Use the graphs in Part (a) to explain what happens to Australia's market of apple after the \"WTO's appellate body largely upheld the findings of a panel of experts in August that condemned the restrictions". Compare the Australia's welfare in the presence of the restrictions on its apple imports and after these restrictions being removed. [6 marks] Page 4 of 9 Question 4 (This question has two parts: a and b) You need to read Article 2 \"\"Our farmers need a better deal\": Study shows true cost of trade barriers\" to answer questions below. Article 2 specically mentions: \"A NEW AgriFutures Australia-funded study shows that farm subsidies and import barriers abroad lowered Australia's net farm incomes by 15 per cent and reduced its farm exports by 29 per cent." Part (a) Use the concept of supply and demand to explain the paragraph above, especially why farms subsidies abroad lowered Australia's net farm income and reduced its farm exports. [6 marks] Part (b) Use the concept of supply and demand to explain the paragraph above, especially why import barriers abroad lowered Australia's net farm income and reduced its farm exports. [6 marks] Hint for both Parts (a) and (b): you can assume that the world consists only of two countries: Australia and a country called the Rest of the World. The two countries initially trade freely with each other and Australia exports its farm products to the Rest of the World. Then analyse what happens when the Rest of the World provides a production subsidy to its farmers or impose an import tariff on its imports of Australia's farm products. Question 5. (This question has two parts: a and b) a. The current Australian foreign exchange at equilibrium is 0.7 US dollar ($US) per Australian dollar. What will happen to the Australian foreign exchange in the two following different scenarios? a.1. Less and less Americans travel to Australia. Please elaborate your answer using the concepts of the demand curve for Australian dollars and the supply of Australian dollars. [3.5 marks] a.2. Due to the Covid-19 pandemic, the US productivity growth is lower than Australia's productivity growth. Please elaborate your answer using the concepts of the demand curve for Australian dollars and the supply of Australian dollars. [3.5 marks] b. Assume the following information: You have $1,500,000 to invest. Current spot rate of pound = $1.61. 90-day forward rate of pound = $1.57. 3-month deposit rate in US. = 2.39%. 3-month deposit rate in UK. = 5%. Does the covered interest parity hold? If you use covered interest arbitrage for a 90-day investment, what will be the amount of US. dollars you will have after 90 days? (Note that students are required to detail every step of implementing the covered interest rate arbitrage to obtain full credits) [5 marks] END OF EXAMINATION Article 1 and Article 2 can be found below Article 1 (Source: Reuters, November 30, 2010) New Zealand wins WTO appeal over Australia apple ban * WTO appeal body largely backs original ruling * Australian restrictions seen as unscientific * Import measures effectively banned NZ apples GENEVA, Nov 29 (Reuters) - Australia's 90-year-old restrictions on imports of New Zealand apples are unscientific and break international trade rules, the World Trade Organization's top court ruled on Monday. The victory for New Zealand should allow it to resume apple exports for the first time since 1921 to its biggest trading partner and clear the way for sales to other markets where its fruit is also banned. The WTO's appellate body largely upheld the findings of a panel of experts in August that condemned the restrictions, which New Zealand says amount effectively to a ban on its fruit, and called on Australia to bring its regulations into line with international trade rules. Like many disputes about trade in food, this one turned on health and safety standards. Australia imposed the restrictions in 1921 to protect local apple trees from fire blight, a pest that also affects pear trees and rose bushes. But New Zealand argued that the restrictions, revised in 2006, were unscientific, a view backed by the original WTO panel which did not find in favour of New Zealand on all counts. Australia said it was appealing that ruling to protect Australian agriculture from health risks. New Zealand officials estimate that lifting the Australian ban could boost apple exports by NZ$30 million ($22.4 million) over two to three years from NZ$400 million in 2009 - good news for New Zealand producers such as Turners & Growers TUR.NZ. A recent study by Malcolm Bosworth and Greg Cutbrush, two visiting fellows at the Australian National University's Crawford School of Economics and Government, found that the ban had driven up the price of apples for Australian consumers. The study, backed by New Zealand's apple growers' association, Pipfruit, said Australia had the second most expensive apples in the world, after Japan, and the restrictions had effectively transferred A$2 billion ($1.93 billion) to Australian growers from consumers between 2001/02 and 2007/08. End or Article 1Article 2 (Source: Beef Central, April 20, 2020) "Our farmers need a better deal": Study shows true cost of trade barriers A NEW AgriFutures Australia-funded study shows that farm subsidies and import barriers abroad lowered Australia's net farm incomes by 15 per cent and reduced its farm exports by 29 per cent. The report by Kym Anderson and Ernesto Valenzuela explores the impact of international agriculture subsidies on Australia, a non-subsidising agricultural export country. The report shows that in the four years to 2018 the average nominal rate of assistance to farmers rose for all OECD countries by one-tenth (from 21pc to 23pc), and for the EU28 by slightly more (by one sixth, from 21pc to 25pc), between 2014 and 2016-18. 160 140 120 100 2014 2016-18 Norway Iceland Switzerland Korea Japan Indonesia* Philippines Turkey EU 28 OECD - Total Israel China Russia Colombia United States Canada Mexico Costa Rica Kazakhstan South Africa Brazil Chile ! Australia ! New Zealand Ukraine Viet Nam India Argentina Aggregate agricultural nominal rate of assistance by country 2014 and 2016-18. (% weighted average using value of production without assistance as weights) *Indonesia refers to 2015 in place of 2016-18. Source: OECD (2019). The report shows that import barriers (tariffs and tariff rate quotas) remain the dominant protective policy instrument globally, but domestic support through budgetary transfers has grown in relative importance this century. In 2014, such transfers accounted for a little over one quarter of the cost of these policies to Australian net farm incomes and agricultural exports. All but one-quarter of the impact on Australian agriculture of global farm support measures are due to policies of the EU, Japan, China and Korea. Australia's red meat, wheat and dairy industries are the most adversely affected by farm policies abroad, but rice and cotton exports also are negatively impacted, especially relative to their production size. The aggregate value of farmer assistance is highest in China and the EU, followed by Japan, the United States, Indonesia and Korea AgriFutures Australia Senior Manager, Business Development, Jen Medway said the findings would equip industries, policy makers and Page 8 of 9MAE 213 International Trade Final Examination T2, 2020 governments with the knowledge to negotiate better trade deals for Australian farmers, fishers and foresters. \"We're increasingly connected with, and competing against, our farming peers across the globe and there's no better time for the Australian agricultural community to reassess the impacts of global trade policies. Even small wins can have significant flow-on effects to producers on the ground." Report author Kym Anderson said the report's key recommendations highlighted the important role of government trade negotiators in ensuring Australian agricultures' global competitiveness. End of Article 2