Question

Suppose two countries Thailand and Australia produce rice and their equilibrium prices differ – Thailand’s equilibrium price is less than Australia’s .

a. Define comparative advantage. Does your definition explain why a renowned international economist has advised Australia to imports rice from Thailand?

b. Would Australia gain from trade with Thailand? Illustrate your answer with a correctly labelled demand and supply diagram.

c. Now the Australian government imposes a tariff on the quantity of rice imported. Explain and show on your graph, the effect of the tariff on rice. Is the tariff policy an efficient?

Answer 1

A)

Comparative advantage is an economic term that refers to an economy's ability to produce goods and services at a lower opportunity cost than that of trade partners. The benefits of buying their good or service outweigh the disadvantages. The country may not be the best at producing something. But the good or service has a low opportunity cost for other countries to import. Yes, this definition explains why Australia should import from Thailand.

B) For Drawing the diagram additional info. is needed such as opportunity cost of other good.