Essentials of Economics Study Set 12

Business

Quiz 9 :
Application

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Quiz 9 :
Application

Comparative advantage: Comparative advantage refers that the ability of person or country to produce goods or services at the lower marginal cost and opportunity cost than the other person or country's goods and services. If the steel price of a nation is lower than the world price, then the nation has comparative advantage on steel production. If the nation enters into international trade, then the nation can sell steel at cheaper price than other nation. Hence, option 'a' is correct.

a) The scenario is such that the world price of wine lies below the price that would prevail in Canada without international trade. Moreover, imports of Canada are too small to have an impact on the world price of wine. Figure 1 depicts this scenario. img The world price lies below the price corresponding to the intersection of the domestic demand and domestic supply curves of Canada. Since Canada trades with the world and has no impact on the world price, the world price is the price that prevails in Canada as well. img Table 1 At the world price, the consumer surplus lies below the demand curve and above the price line, and the producer surplus is given by the area above the domestic supply curve and below the price line. b) After the cold summer destroys grape harvest, the supply of grapes reduces, which leads to a rise in the price of grapes and therefore the cost of manufacturing wine increases. Due to this, the world price of wine also rises. The resulting change in the market for wine in Canada is shown in Figure 2. img As the world price rises, the price in Canada also rises, as shown by the upwards shift of the price line. Due to this, the consumer surplus decreases as given by the sum of D and E. The producer surplus rises by D. The total surplus falls by E. Since the consumer surplus has decreased, consumers lose. Since the producer surplus has increased, producers win. Since total surplus has declined, Canada as a whole is worse off.

The domestic price that prevails without international trade tells us how the effects of free trade can be determined by comparing the domestic price without trade to the world price. A low domestic price shows that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer. This shows how international trade could be beneficial to countries. All countries can benefit from trading with one another because trade allows each country to specialize in doing what it does best. It tells who gains and who loses from free trade among countries and how the gains compare to the losses.