Question 6 (25) Namibia and South Africa are both members of the Southern Africa Customs Union. One characteristic of a customs union is free trade, where countries trade without any costs. Suppose, both these countries produce and consume only two products namely Fish and Vehicles. The production of fish is assumed to be relatively more labour abundant whilst that of vehicles is assumed to be more capital-intensive (f=0.3 and v=0.7). Use the information above to answer questions 6.1 and 6.2, based on the neoclassical trade theory. 6.1 When there are no arbitrage opportunities between Namibia and South Africa, the neoclassical trade theory predicts that there will be a one-to-one equalization of the prices of the final goods as well as the price of the factors of production, given that both goods are produced in both countries. Using a Lerner diagram, describe what will happen to the production of both fish and vehicles if the price of fish increases. [10] 6.2 Assuming Namibia has a high intensity of labour abundance whilst South Africa has a high intensity of capital abundance. Using the production possibilities curve (PPC) and the Heckesher-Ohlin proposition, explain how Namibia and South Africa can gain from international trade by exchanging Fish and Vehicles. [15] Question 6 (25) Namibia and South Africa are both members of the Southern Africa Customs Union. One characteristic of a customs union is free trade, where countries trade without any costs. Suppose, both these countries produce and consume only two products namely Fish and Vehicles. The production of fish is assumed to be relatively more labour abundant whilst that of vehicles is assumed to be more capital-intensive (f=0.3 and v=0.7). Use the information above to answer questions 6.1 and 6.2, based on the neoclassical trade theory. 6.1 When there are no arbitrage opportunities between Namibia and South Africa, the neoclassical trade theory predicts that there will be a one-to-one equalization of the prices of the final goods as well as the price of the factors of production, given that both goods are produced in both countries. Using a Lerner diagram, describe what will happen to the production of both fish and vehicles if the price of fish increases. [10] 6.2 Assuming Namibia has a high intensity of labour abundance whilst South Africa has a high intensity of capital abundance. Using the production possibilities curve (PPC) and the Heckesher-Ohlin proposition, explain how Namibia and South Africa can gain from international trade by exchanging Fish and Vehicles. [15]
