Chapter 10 part 2

Question 1

Discuss trade due to differences in natural resources

Answer 1

Countries have different endowments of factors of production - land, labour, capital, entrepreneurship - cannot always be moved…without costs. All we need to trade to be beneficial is that economic resources are unevenly distributed between countries

Question 2

Winters’ three conditions for uneven distribution of resources:

Answer 2

1. Production functions for the two products give constant returns to scale if both factors are applied proportionately, but diminishing returns to any individual factor
2. Goods differ in their requirements of different factor inputs
3. Countries have different relative factor endowments

Question 3

Discuss the commodity trade supply-and demand model + calculations

Answer 3

Trade in commodities influenced by demand for and supply of the commodity. We develop a supply and demand model to analyse trends in commodity trades
1. Consumer demand function - relationship between per capita income, commodity prices and consumption of the product. Demand can respond to change in price and/or income

Question 4

Discuss income and price elasticity and define elastic and inelastic

Answer 4

textbook

Question 5

What is the rate of technical substitution? RTS

Answer 5

RTS shows how the manufacturers respond to a change in the relative price of their raw materials. Subject to technical change and development. Substituting oil for gas or coal in Europe right now.

Question 6

Trade is subject to cycles at three levels:

Answer 6

1. Seasonal - grain and oil, cyclical demand and supply patterns
2. Short-term - grain and oil, cyclical demand and supply patterns
3. Long term - relationship between GDP and growth, how country’s economies develop

Question 7

List and discuss Rostow’s five stages of economic development

Answer 7

Stage 1 - the traditional society:
*Agricultural economy
*Unchanging technology restricts output per capita
*Barely any sea trade

Stage 2 - the pre-conditions of take-off established
*Requires surplus above subsistence, development of education and degree of capital accumulation - all provide foundation for economic growth
*Small sea trade but active and growing fast

Stage 3 - The take-off
*Technology extended over all economic activities
* Increased investment leads to output regularly outstripping population growth
*New industries appear, older one’s decline
*New imports and exports

Stage 4 - Maturity
*60 years after take-off
*Characterised by refined and complex processes with a shift in focus from coal, steel and heavy engineering to machine tools, chemicals and electrical equipment
*More imports as raw materials depleted, manufacture dominates export

Stage 5 - Mass consumption
*Movement of leading sectors of industry towards durable consumer goods and services
*Population can afford more than basics, and this brings about change in structure of working population to services

Question 8

Price elasticities of sea trade in short and long term?

Answer 8

Short term - demand for sea transport price inelastic
Long term - liner service more price elastic

Question 9

Why is liner trade more price elastic?

Answer 9

1. Lowering prices encourages the substitution of cheap foreign substitutes for local products
2. Liner operators that drives transport costs down generate new cargoes

Question 10

Unit cost formulas

Answer 10

Know from slides NB