Q1.
It was traditionally used for studying the trade flows associate with the same for measuring the joint economic activity and costs of trade (1, p.2, pp. 2). This model predicts that the volume of trade is directly associated with the GDP of each trading partner (country), however inversely proportional to the distance between them. In addition, distance and market size between markets determine how much nations buy and then sell, hence these transactions benefit both sellers and buyers. For example, countries tend for spending a large fraction of their income on non-traded goods and services as per the gravity model. This model influences the size of a nation’s economy on their trades and distance with other determinants that affect trade (Lec 2, p.3).
For example, the two principal factors such as a country’s economic size and the distance between the country and its trading partner based on which predicting trade flows between nations such as Canada and the USA is to be carried out. Considering this trade between USA and Canada is found to be productive as per the two principals of each nation, for example, the market size of Canada is $1.88trillion and its GDP growth rate is 1.40, Canada is 10% of the US Market in Size and the US buys around 75% of Canada’s exports and further produces 50% of its imports. This reflects a productive trade between the US and Canada. The economys size of Canada, its GDP, its value of goods and services attract the US to trade with it. The import and export between the US and Canada can determine the size of the Canadian economy as it is directly proportional to the volume of the exports and imports. Furthermore, the US and Canada share the longest international border 5,525 miles, along with 120 land-ports-of-entry, and their bilateral relationship is one of the closet including extensive. This gets reflected in the high volume of bilateral trade of around 2billion dollar per day in goods and services, along with in people-to-people contact that is about 4200,000 people cross every day between the USA and Canada (2, pp. 1). Hence, as per the facts reflected by using the Gravity Model such as its economic size and distance between it and the US make it a perfect choice for the US to trade. Thus, Canada is the second-largest trading partner of goods for the US.
Q3._300
The four pillars on which the respective model are based on production possibilities frontiers, indifferences curve and isovalue lines; these fit together for illustrating how the trade partners are established by combining the factors associated with demand-side and supply-side (week 5, p.3). This model refers to a general model, which includes Hecksher-Ohlin and Ricardian models as specific cases such as two goods namely Food (F) and Cloth (C) and each of the trading countries PPF (Production Possibility Frontier) needs to be a smooth curve. For example, an economy having PPF at point TT would be producing at Q that is on the highest possible isovalue line
Relative supply and relative prices, an increase in the price of cloth relative to the price of food makes an isovalue line steeper, where production gets shifted from Q1 to point Q2 and relative supply of the clothing products to food products gets increased with a relative price of cloth to food
Furthermore, differences in labour skills, labour services, technology, land and physical capital between trading countries cause differences in the possibility frontiers. For example, an indifference curve is always downward sloping; if production of cloth is less then it is a must to have more production of cloth to be equally satisfied. This curve lies farther from the origin making the consumers satisfied, which reflects that the volume of production of both the goods are more. However, the curve becomes flatter whenever there is a shift to right reflecting more cloth with less food, this means an additional yard of clothing becomes less valuable concerning how much calories of food, one can give up for cloth.
The PPF of a country determines their relative supply functions, for example, the value of consumption associated with a nation’s economy must be equal to the value of the productions associated with the same economy (Lec 5, p.4). In the respective model, relative price converges as an outcome of the trade. For instance, if the cloth is relatively cheap in a home country and relatively costlier in a foreign country before a trade getting opened, then the effects of trade were for raising the cloth-related price in the home nation and reducing the same in the foreign country.
The functions of national relative supply determine functions of a world relative supply that along with the world relative demand determines the equilibrium under the international trade. For example, consumption choices are based on the relative price of products and preferences and the economy supplies cloth reflects that the quantity of cloth getting produced is exceeding the quality of cloth getting consumed, as a result, imports food. For instance, an economy exporting cloth is better off whenever the cloths price gets raised as compared to the price regarding food and a higher relative price of cloth reflects that more amounts of calories of food could be imported for each yard of the cloth getting exported.
Q6.
The four market structures are perfect, monopoly, monopolistic and oligopoly, for example, monopoly is the market has only one firm that gives a scope to this restaurant to be a single seller selling a unique product in the Australian Food market. This type of market structure would make this business relieved from any competition as this restaurant would be the sole seller of Asian Traditional Foods with no close substitute in the respective market.
However, oligopoly is the market structure, where only a few firms exist (Lec 6, p. 9). It is also beneficial because in this market there would be a small number of firms operating in the same industry and even this business and other firms would not keep each other from having significant influence.
Furthermore, monopolistic is the market structure that is based on an imperfectly competitive marketing environment assuming that every firm can differentiate their competitor’s products, known as product differentiation. Furthermore, in this market, every firm ignores the effects that changes in their prices would have on the prices, which the competitors set, even though every firm faces the same competition and behaves as if they are monopolistic. Here, this market would offer scope to the respective business selecting an output at which the marginal revenue, an increase in their revenues from selling additional products and services, equal marginal costs with the cost of production of additional services exist. This business can differentiate its products and services from the other restaurants of Australia. This market structure gives a clear picture to the restaurant when they can enter the industry or can exit the industry, whenever the number of firms seems to be greater or even less than the equilibrium number then the firm has an incentive to enter or exit the industry. For example, if this restaurant has an incentive for entering the industry whenever their revenues would exceed all the costs and for exiting the industry whenever revenues are less than all the costs.
However, perfect competition reflects that all income from production is paid to the owners of the factors of production that is no monopoly or excess profits exist. Since, in a perfectly competitive market, a companys value is determined by replacing the costs of their capital stocks, a drop in their capital goods price leads to a drop of their firms value (Garlappi and Song, 20187 p.3, pp. 2). In this market, the proposed business would be having perfect knowledge about the market, there is no information failure and knowledge gets shared between every participant operating in this market. There are no barriers to entering, thus the existing restaurant business of the same market cannot drive any monopoly power. Unlike imperfectly competitive markets, this firm would not be dominated by any existing firms as happens in imperfect competition generating excess profits and monopoly profits (Lec 12, p.12).
b.
Participating in the monopolistic market structure, the respective business can easily differentiate its products from the products of its competitor, with no need for the USP concept to be applied in this context. In addition, product differentiation with internal economies of scale can lead this business to trade between Australia and NZ or Australia and India, where no comparative advantage differences would exist between these two nations. Thus, trading could be an opportunity that this business would be availing in the monopolistic market. This business can easily raise the prices of its products and services somewhat above its competitor’s products because of the advantage of product differentiation. However, this business needs to compete with other firms having prices, which are believed for being uninfluenced by every firm’s actions. Thus, in future, this company would be having opportunities to increase its market size, expand its business operations, increases its product range, and many others because the respective market would allow this business for gaining profits from trade through a lower cost with price along with through a wider range of consumer choices. In addition, this business in future can engage in the intra-industry trade as well (Lec 6, p.45). As a result of getting involved in trade, the company can increase its market size, where trade would help this business for decreasing the average cost in the industry driven by a monopolistic market. Thus, getting involved in trade would increase the product varieties, which the Australian consumer could buy under this market structure; as a result, it would increase the welfare of the Australian consumers. Hence, under this market structure, the respective business can build an effective and long-lasting relationship with the Australian consumers ensuring the success rate of this business in future in the Australian food & beverage sector.
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