Question

Assume that the world consists of two countries – US and Germany. Both the countries produce two goods – Automobiles and Corn. There are three factors of production, Capital, Land and Labour. The specific factor in Automobiles is Capital while in Corn it is Land. Labour is used in the production of both the goods. Germany is assumed to be relatively more well- endowed in Capital than the US, while US is relatively more well-endowed in Land than Germany.

Answer the following:

1. German farmers /landowners have been opposing free trade with the US. Why is that the case? Explain in detail using appropriate figure(s).                                                                              (10)                               
2. How would consumers in the US gain from trade with Germany? Explain using an appropriate figure.                                                                                                                                                (10)

Answer 1

Ans a) According to the OECD,(Organization for Economic co-operation and development) Germany's economic growth will continue to remain solid. A June 2017 OECD economic forecast says high demand for German goods from Asia and the U.S. is currently driving the country's growth, but is expected to slow down as an effect of depreciation of the euro and slowing import growth in China. Domestic demand is an anticipated to take over as the main source of growth in Germany, with high household demand and increased government spending. According to the OECD forecast, because Brexit covers may affect the euro, some international trade businesses are considering shifting investments from the United Kingdom to Germany, potentially making it a more attractive trading market. That's why German farmers have been opposing free trade with the US.

b) Consumers in the US gain from trade with country because Germany is the United States' largest European trading partner and the sixth-largest market for U.S. exports. Germany's economy grew strongly in 2017, driven by investment, consumption, and international trade. In October 2017, the German government an uplifted its official GDP forecast for 2017 to 2 percent (from a 1.5 percent forecast in April), almost matching the 1.97 percent forecast by the Organization for Economic Co-operation and Development (OECD). Germany's GDP of $3.466 trillion contains 5.59 percent of the world's economy.