Question

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 pursuit 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 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?
    
    Question 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?
    
    Question 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.

Answer 1

PART 1

Trade between Ghana and Côte d'Ivoire cannot be explained by comparitive advantage.

Comparitive advantage exists when a country can produce a good or a product at a lower opportunity cost than its trading country. Both of these countries are of similar kind, similar environment, similar background, soo assuming that the opporunity cost will also be similar in both of these countries we can say that none of them enjoys comparitive advantage.

In case of Ghana and Switzerland both the countries are very different in most of the ways . So the opportunity cost of producing a good in these countries will be very different from one another. So we can say that the trade between Ghana and Switzerland can be explained through comparitive advantage.

PART 2

Import substitution inddustrialisation means imposition of trade policies that aim to replace foreign imports by domestic production. It's main objective is to reduce the dependency on other countries and instead increase domestic production of industrialised products.

It's effects on Ghana -

• Significant growth of domestic manufacturing sector
• Expantion of existing industries
• Increase in production of capital goods
• Increase in total industrial output
• Growth of state owned firms

Learning by doing is a method by which economies learn ways to inrease production by practice and improvements.

The decline in share of private sector industries in production requires government intervention. The government needs to focus on the private industries involved in malpractices and take over those industries.