ECON2500 - ECON 7036: International Trade and Investment Policy - Economics Assessment Answer

TASK:

Let us use the specific-factors model to analyze Australia’s mining boom. Assume that Australia produces two goods, mining primary goods (coal) in the mining industry, and agricultural goods (wine). Assume that production in both sectors uses unskilled labor which is mobile across both sectors, i.e., unskilled workers can work in both the mining industry as well as agriculture. In addition, the industries need high-skilled specialists: the mining industry needs mining engineers who have specific knowledge and can only work in the mining industry; the agricultural industry needs viticulturists who have specific knowledge and can only work in the agricultural sector. In the short-run, low-skilled workers cannot learn to become a mining engineer or a viticulturist.
a) Illustrate the PPF of Australia and show the autarky equilibrium.
b) Show the free trade equilibrium assuming that the relative price of mining goods is higher on the world market than under autarky. Illustrate the exports and imports of Australia!
c) Now the mining boom occurs. How does production in Australia change during the mining boom? How can you show this in your graph?
d) What has happened to Australia’s terms of trade?

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