Define the following terms: comparative cost advantage, tariffs, balance of trade, internal trade, and exchange rate. Calculate the terms of trade for 2019 and 2020, and state whether they are favorab

Here is the answer to question 8:

*a) Definitions:

*i) Comparative cost advantage: This is the ability of a country to produce a good or service at a lower opportunity cost than another country.

*ii) Tariffs: These are taxes or duties imposed by a government on imported goods and services.

*iii) Balance of trade: This is the difference between a country's total value of exports and its total value of imports over a specific period.

*iv) Internal trade: This refers to the exchange of goods and services within the geographical boundaries of a single country.

*v) Exchange rate: This is the value of one country's currency in relation to another country's currency.

*b) Terms of Trade calculations:
The formula for Terms of Trade (TOT) is:

$$\text{Terms of Trade} = \frac{\text{Index of Export Prices}}{\text{Index of Import Prices}} \times 100$$

*i) Calculation of terms of trade for 2019 and 2020:
For 2019:

$$\text{TOT}_{2019} = \frac{98}{98} \times 100 = 1 \times 100 = 100$$

For 2020:

$$\text{TOT}_{2020} = \frac{100}{125} \times 100 = 0.8 \times 100 = 80$$

The terms of trade for 2019 is $\boxed{100}$ and for 2020 is $\boxed{80}$.

*ii) State whether it is favorable or unfavorable:
For 2019, the terms of trade is 100, which is generally considered neutral or stable if 100 is the base year.
For 2020, the terms of trade is 80. This means that for the same quantity of exports, the country can now obtain fewer imports compared to the base period (or 2019). Therefore, the terms of trade for 2020 is unfavorable.

*c) Three reasons why countries are involved in international trade:

• Differences in natural resources: Countries possess varying endowments of natural resources (e.g., oil, minerals, fertile land), leading them to trade for resources they lack.
• Comparative advantage: Countries specialize in producing goods and services where they have a lower opportunity cost, which leads to greater overall efficiency and output when they trade.
• Economies of scale: Specialization allows countries to produce goods in larger quantities, achieving economies of scale and lower per-unit production costs, making their products more competitive internationally.

*d) Four measures a country can use to remedy a balance of payment deficit:

• Devaluation or depreciation of currency: This makes exports cheaper and imports more expensive, encouraging exports and discouraging imports.
• Import restrictions: Imposing tariffs, quotas, or other non-tariff barriers to reduce the volume of imports.
• Export promotion: Providing subsidies, tax incentives, or marketing support to domestic industries to boost exports.
• Deflationary policies: Implementing fiscal (e.g., higher taxes, reduced government spending) or monetary (e.g., higher interest rates) policies to reduce aggregate demand, thereby curbing import demand and freeing up resources for exports.