Custom Union and Fdi Assignment Questions to Be Understood... by Arun Verma

Only available on StudyMode
  • Download(s) : 638
  • Published : November 18, 2010
Open Document
Text Preview
ECO520- International Business Economics
Submitted by: Arun Verma Roll No. 26 (MBA- IB)

Q1. Suppose that the autarky price of commodity x is $ 10 in Nation A, $8 in Nation B, and $ 6 in Nation C, and that Nation A is too small to affect prices in Nation B or C by trading. If nation A initially imposes a nondiscriminatory ad valorem tariff of 100 percent on its imports of commodity X from Nations B and C, will Nation A produce commodity X domestically or import it from Nation B or Nation C? Ans: Autarky is the quality of being self-sufficient. Autarky exists whenever an entity can survive or continue its activities without external assistance. Autarky price of commodity X in:

Nation A: $10
Nation B: $8
Nation C: $6
Now since it is said that the Nation A is so small that it could not affect the prices in nation B or C, it means that if it stops or starts importing the commodity from them it would hardly affect them. So, why should not it begin to manufacture the commodity itself? But if we will see the figures, then it shows that if A will produce X on its own, it will cost around $10 and if it will import it from Nation B or C, then it will cost it around $16 and $12 respectively (including the ad-valorem tax levied by A on Imports from B and C).

Q2. The Karma computer company has decided to open a Brazilian subsidiary. Brazilian import restrictions have prevented the firm from the selling into that market, while the firm has been unwilling to sell or lease its patents to Brazilian firms because it fears this will eventually hurts its technological advantage in the US market. Analyze the Karma’s decision in terms of the theory of multinational enterprise. Ans: The unwillingness of Karma Computers of selling or leasing its patients to the Brazilian firms is very well and is in the favour of the Company, since it will otherwise responsible for the loosening of the comparative advantage of the company over others, which is its technological know-how. So, if the company would reveal its technology to Brazil, then they might copy it by making some changes with the help of their research and development methodology, and would then be exporting the same back to them and to the other parts of the world. This would lead to a decrease in the market share of the Karma Company as a whole. In order to avoid this, the decision of the Company is reliable and thus will act as a preventive measure for the hindrance in the further technological growth.

Q3. Show the following information diagrammatically using offer curves and using your own figures, wherever necessary. India and Germany are trading partners. India exports cloth to Germany and imports machines. Equilibrium is established where terms of trade are equal to 1 for both nations at 70 million units. Germany levies a 100% ad valorem tariff on imports from India. Show the change in terms of trade. India responds with a retaliatory tariff. Again show where equilibrium is established after the retaliatory tariff. In this context explain what an optimum tariff is. [pic]

In this diagram, we come to interpret that there exists an equilibrium at point A, where Terms of Trade= 1(imports {70}/exports {70}). Now, when Germany levied a 100% ad-valorem tariff on imports from India, the offer curve of Germany shifted towards its importing commodity side and meets the offer curve of India at point B. Her e, the Terms of Trade for Germany = (65/60) = 1.3(favourable) And for India = 60/65 = 0.78 (unfavourable).

Thus, India imposes a retaliatory tariff, due to which the offer curve of India shifted towards its importable commodity side. Now, it meets the shifted offer curve of Germany at point Q, which is known as the equilibrium point. Now, here Terms of Trade for India becomes favourable i.e. 45/40 = 1.12. This is the whole process of imposing the tariffs and retaliatory tariffs, taking the case of India and Germany. Q4. Which of the following are direct foreign...
tracking img