Jamey paper 2 mistakes

Question 1

Explain why Mexican producers might choose to dump their sugar in the US market.

Answer 1

The intention is to undercut rivals with low prices in the short-term and prices will then be increased in the long-run once domestic producers have been forced out of the market and competition has been removed (idea of predatory dumping)

Question 2

Consider how an economist would decide whether the accusation that Mexican producers were dumping sugar in the US was justified

Answer 2

• For an explanation that low prices are because of relative factor endowments, i.e. Mexico is better at producing sugar than the US
• For an explanation that suggests that the costs of production would need to be examined and whether the price is below cost or whether the low prices are a reflection of factor endowment

Question 3

Consider who, if anybody, in the US and Mexico might benefit from a trade war despite the advantages of free trade.

Answer 3

• For an explanation of the benefits of free trade based upon comparative advantage.
• For a consideration of those who might benefit from a trade war for example domestic producers, workers and consumers in the short-run.

Question 4

Explain two factors, other than India’s ban on US agricultural products, that could explain the change in the US balance of trade that you have identified.

Answer 4

A growth in the deficit could be caused by a number of factors. These include:
• A decline in India’s exchange rate against the US dollar.
• A change in tastes away from US goods in favour of India’s goods.
• An improvement in the efficiency of Indian industry that means that the price of Indian goods is lower than the price of American goods.
• The imposition of tariffs on US goods by the Indian government.

Question 5

Explain a possible reason why China imposed export quotas on tungsten and molybdenum.

Answer 5

The effect would be to raise the export price (1 mark) and as a result raw material costs for the production of a range of American products would rise giving an advantage to Chinese producers of these goods (1 mark)

There are a number of other possible reasons that could be explained by the candidate.
• e.g. to preserve declining/scarce resources and ensure a supply for domestic producers
• to increase revenue from exports due to the increase in price.
• to reduce production of tungsten and molybdenum because of the environmental impact of their production.

Question 6

Explain the difference between Nominal and Real exchange rate

Answer 6

Nominal - one that is expressed without taking into account the effects of inflation

Real - The nominal exchange rate has been adjusted, taking into account the effects of inflation on the value of a currency in terms of purchasing power / reflects the purchasing power of money at constant prices

Question 7

How did decreasing price of oil in Russia lead to depreciation of the Rouble?

Answer 7

• shift of demand curve to left
• Russia’s exports are heavily dependent on oil; the oil price has tumbled from its mid-2014 peak of over US$100 a barrel to only about US$40 a barrel
• This has meant that other countries needed fewer roubles to buy oil from Russia, causing a shift of the demand curve to the left with a resulting fall in the price and in the quantity traded

Question 8

How does the principle of comparative advantage benefit New Zealand’s economy?

Answer 8

• The principle of comparative advantage is when a country produces a good / service at a lower opportunity cost than another country
• Comparative advantage is determined by factor endowment
• Allows for better allocation of resources through specialisation and trade