i. Define the terms Absolute Advantage (A.A.) and Comparative Advantage (C.A.) using an example related to your household.

 

ii. Using the concepts of Opportunity Cost (O.C.) and Comparative Advantage (C.A.), explain why a dentist might employ a less efficient (slower) dental nurse to carry out the tasks that the dentist may be more efficient (faster) at completing themselves?
 

 

Answer:

The area of consumer surplus after free trade is (A+B+D) while the area of producer surplus is C.

After the market shifts from the state of autarky to free trade, consumers of importing market become winner and producers loss (Baldwin and Robert-Nicoud 2015). This happens as world price goes below the domestic price level. Thus, consumers need to pay fewer amounts for purchasing steels. On the other side, producers loss as they sell their products at lower prices, which is lower compare to their desired price level.

ii) After imposition of tariff, consumer surplus becomes (A+B+D) while producer surplus becomes (F+C). Moreover, the country faces welfare loss by imposition of tariff on imports (Nimon and Beghin 2017). In the above diagram, two arrow sign show the area of welfare loss.

Protection of infant industry: Through restricting international trade, a country can protect its infant industries from foreign markets. Infant industries are referred as new industries with small scale of production and cannot archive their economies of scale (Beverelli, Fiorini and Hoekman 2017). Thus, they are not ready to compete with other large-scale industries in the world market.

Protection of employment: By applying trade restrictions, a country can protect its employment opportunity (Nimon and Beghin 2017). Under this situation, domestic industries create job opportunities for their domestic people and this in turn helps the country to reduce its unemployment level. Through protection, other foreign people cannot take job within domestic market.

After imposition of tariff, price in domestic market increases while price in exporting market decreases. Consequently, consumers of exporting country gets excess amount of welfare by increasing their consumer surplus by decreasing price level (Bagwell and Staiger 2016). However, due to this decreasing price, the amount of producer surplus in domestic market decreases. Moreover, the government of exporting country cannot experience any economic benefit or loss due to this tariff imposition on foreign market. After imposition of tariff exporting country can consumer product with cheaper prices.

ii) Firstly, through free trade, a country can specialise in on some particular product at which it has comparative advantage (Winston and Yan 2015). Secondly, free trade helps both exporting and importing country to increase consumptions by getting more amount of food compare through trade to their autarky position. Hence, these two points show that free trade is better than no trade. According to Ricardo, under free trade, a country can gain by producing the product in which it has comparative advantage.

References:

Bagwell, K. and Staiger, R.W., 2016. The design of trade agreements. In Handbook of Commercial Policy (Vol. 1, pp. 435-529). North-Holland.

Baldwin, R. and Robert-Nicoud, F., 2015. A simple model of the juggernaut effect of trade liberalisation. International Economics, 143, pp.70-79.

Beverelli, C., Fiorini, M. and Hoekman, B., 2017. Services trade policy and manufacturing productivity: The role of institutions. Journal of International Economics, 104, pp.166-182.

Nimon, W. and Beghin, J., 2017. Ecolabels and international trade in the textile and apparel market. In Nontariff Measures and International Trade (pp. 321-326).

Winston, C. and Yan, J., 2015. Open Skies: Estimating Travelers’ Benefits from Free Trade in Airline Services. American Economic Journal: Economic Policy, 7(2), pp.370-414.