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6. [30] Trade in Africa

Source: https://www.economist.com/finance-and-economics/2017/12/07/african-countries-are-building-a-giant-free-trade-area

African countries are building a giant free-trade area

They have long traded with the world, now they want to trade with each other

Dec 7th 2017| KAMPALA

“‘AFRICA must unite,’ wrote Kwame Nkrumah, Ghana’s first president, in 1963, lamenting that African countries sold raw materials to their former colonisers rather than trading among themselves. His pan-African dream never became reality. Even today, African =|countries still trade twice as much with Europe as they do with each other. But that spirit of unity now animates a push for a Continental Free-Trade Area (CFTA), involving all 55 countries in the region. Negotiations began in 2015, aimed at forming the CFTA by the end of this year. In contrast to the WTO, African trade talks are making progress.”

The chart below shows average educational attainment for men aged 15-49 in 2015. The chart shows considerable variation in educational attainment across African countries. (A map of Africa with country names is included for your reference.)

Source: https://www.nature.com/articles/nature25761

Africa MAUI Qsean

Imagine a 2-country, 2-product world where the two countries are South Africa and Ethiopia. The two products are computers and apparel. Assume computers are more skill intensive than apparel.

a. [5] Before trade, where would you expect computers to have a lower relative price? Please select an answer.

South Africa                           Ethiopia                       Same in both countries

b. [5] Please explain briefly.

Now assume that trade barriers fall between South Africa and Ethiopia.

c. [5] Which product would you expect Ethiopia to export? Please select an answer.

Computers                               Apparel                       Ethiopia would not export

d. [5] Please explain briefly.

Now assume that Ethiopia invests in education and raises educational attainment. Nothing changes in South Africa.

e. [5] What would you expect to happen to the amount of trade between Ethiopia and South Africa in the simple 2-product, 2-country model?

Increase                       Decrease                      Stay the same

f. [5] Please explain briefly.

Answer 1

Given two products and two country world, where South Africa has more skilled labor than Ethiopia, and computers is more skill intensive than apparel.

Therefore, before trade, Ethiopia will have lower relative price than South Africa.

This is because, Ethiopia doesn't have much skilled labor, such that the production would be less in Ethiopia and due to less production, the prices would be less.

Also, using production possibility frontier, it can be seen that the slope is given as $-\frac{P_{y}}{P_{x}}$ , therefore as the production of y would increase so would the slope and its price too. Therefore, production of computers is low relatively, then it can be said that the relative prices would be low too.

Ethiopia would export Apparel and South Africa would export Computers.

Reason behind this is that in South Africa, Skill labor productivity is more in producing Computers than in Ethiopia. That's why it has a comparative advantage in producing Computers while Ethiopia would export Apparel. And that's why Ethiopia would export Apparel.

Assuming that Ethiopia invests in education, thereby increasing the amount of skilled labor in the country. While no change in South Africa.

Trade would decrease as, Ethiopia would then produce computers at home too as the amount of skilled labor would increase. It's like labor shifts from one sector to another.

As Ethiopia has a comparative advantage in producing Apparel, the production decreases as more skilled labor is present, that's why the amount of trade would decrease between these countries.