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. .

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QUESTION B.1 Ghana imports and exports food from and to neighbouring Côte d'Ivoire. The latter nation is very similar to Ghana in most ways. It has a similar environment, a similar level of education, and similar institutional background. Would you argue that trade between the two countries can be explained by comparative advantage? Why or why not? . Ghana also exports food to Switzerland. The latter nation is very different to Ghana in most ways. Would you argue that trade between the two countries can be explained by comparative advantage? Why or why not? .

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QUESTION B.2 Explain import substitution industrialisation and how it can affect Ghana. What role does learning by doing play and when does it make sense for the government to interfere? .

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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.1 Yes we can say that the trade of ghana with both the nations is a result of comparitive advantage. Comparitive advantage is a situation when a nation which is able to minimize its opportunity costs associated with the production of a good or service, produces that good in the home country and exports it to other countries who donot have a comparitive advantage in the good's production. Ghana exports food to Switzerland because Ghana is an agricultural economy and has abundant of food available in the country,  It imports certain foods from Côte d'Ivoire because it may not have food production for certain items being carried out in its domestic country.

B.2 Import subsitution industrialization is a scenario when the government decides that they are going to replace imports by producing imported items in the domestic country. It is an on-going process and cannot be executed completely within a day. The reason is that countries do not have enough technology level to be self sufficient. They have to reach the stage of self sufficiency by learning by doing.

B3. The diagram for the ghanaian and switzerland welfare is given as follows:

B4. VER is not likely to imporve the average effeciency of Ghananian farms. Its because VER would disable all forms of foreign competition for the farms and the farms would have no reason to evolve for the better. So, VER would be a good policy for the consumers because they will face reduced prices but for the producer effeciency it would not be good.