Question

Short answer questions. Answer each in up to 200 words. .

Background Imagine that you work for the World Bank and you have been called to Ghana to aid the new president to come up with a new international trade strategy. . You are told that the new government is interested in moving away from agriculture and into manufacturing. To do so, the government wants to pursue a policy of import substitution industrialization (ISI). . You are given a brief about Ghana highlighting the following points: About half of Ghana’s population depends on agriculture, but Ghana still imports some of its food. The majority of Ghana's people live in rural areas and exist on a subsistence way of life. Ghana has one of the highest rates of income inequality in the world. Nearly half of the population is employed in agriculture. .

.

QUESTION B.3 Ghana’s president’s ISI strategy is to ask Switzerland to adopt a voluntary export restraint (VER). He believes that this is likely to increase Ghanaian welfare. Using two diagrams (one for each country) explain the Ghanaian welfare consequences of this policy. .

QUESTION B.4 Explain if the VER is likely to improve the average efficiency of Ghana’s farms? .

QUESTION B.5 After a meeting with Ghana’s president, you learn that the government is also interested in repatriating migrants that went to European countries to study engineering a decade ago. Explain how this is likely to change Ghana’s comparative advantage.

Answer 1

B.3. Figure-1 in the document attached below illustrates the impact of Voluntary Export Restraint(VER) on the importing country Ghana and figure-2 in another document attached depicts the impact of VER on Switerland or the xporting country, in this case. The y and x axes in both figures represent the price of any particular good or service traded between the two countries. The P(FT) in both figures denote the world price of the good or service under free trade and in figure-2 D(EX) and S(EX) denote the demand and supply of the good or service in Switzerland or exporting country and D(IM) and S(IM) are the demand and supply of the good or service in Ghana or the importing country. The total or overall export level of the good or service under free trade is the difference between S(EX) and D(EX) in figure-2 which is equivalent to the free trade import level of the good or service or the difference between D(IM) and S(IM) in figure-1. Now, following the imposition of VER by the exporting country Switzerland, the world price of the good or service decreases from P(FT) to P(EX,VER) in figure-2 and the demand and supply of the good or service in the exporting country or Switzerland become D(VER,EX) and S(VER,EX) respectively and the total export level of the good or service now becomes the difference between S(VER,EX) and S(VER,EX) in figure-2. Due to the VER, an increase in world price of the good or service is documented for the importing country as reflected by figure-1 where the world price of the good or services increases from P(FT) to P(VER,IM) and the demand and supply of the good or service in the importing country or Ghana now become D(VER,IM) and S(VER,IM) respectively. The total import level of the good or service by Ghana becomes the difference between D(VER,IM) and S(VER,IM) following the imposition of the VER.

Now, prior to the imposition of VER by the exporting country or Switerland, the consumer surplus in Ghana or the importing country is indicated by the area A+B+C+D+E under free trade in figure-1. The producer surplus in Ghana is indicated as area F under free trade. After the VER is imposed, the consumer surplus in Ghana or the importing country decreases by the area B+C+D+E and the producer surplus now becomes area F+B. Therefore, the producer gains the area B in addition to the free trade surplus of F or the producer surplus or welfare increases in Ghana after the imposition of VER as depicted in figure-1.

B.4. The economic welfare of the producers in Ghana increases due to the imposition of the VER by Switzerland or the exporting country and the importing price of the concerned good or service also increases leading to a reduction in the overall import of the good or service by Ghana in the international market. This implies that the demand for the local good or service would increase among the domestic consumers in Ghana as the demand for imported good or service would decrease due to higher price after the imposition of VER. Therefore, the economic welfare of the local producers and farms in Ghana increases potentially leading to higher productive efficiency of the local producers and farms in the country as well.

B.5. Based on the information provided in the brief article presented in the question, Ghana has predominantly been an agricultural country with higher emphasis or specialization on agricultural production thereby implying that the country traditionally has a comparative advantage in agricultural production compared to other production sectors in the domestic economy. Now, if the Ghana government is interested to repatriate the international migrants from Europe who arestudying engeenering back into the country, it would potentially increase the supply of skilled and specialized labor force in the domestic labor market in Ghana which could expectedly boost the manufacturing and industrial sector in the country as these migrats are mostly specialized and educated in engeenering and related technical expertise. Hence, excessive supply of skilled and technically specialized labor-force in te country could shift the previous emphasis from the agricultural sector to the industrial manufacturing sectors thereby shifting the comparative advantage from the agricultural sector to mostly manufacturing and industrial sector as well.