Comparative advantage of a country emerges when it is able to produce a product or a service at an opportunity cost, which is lower than any other country. In other words, a country will specialize in the production of a particular good or service, which it can produce at a relatively cheaper cost than others. The comparative advantage theory states that there would be a rise in the economic welfare if the countries can specialize in the production of goods at the lowest opportunity cost (Levchenko and Zhang 2016). Hence, according to the question, Australia has comparative advantage in production of beef and Japan has comparative advantage in production of cars. Hence, Australia will specialize in beef production and Japan will specialize in car production. Thus, Japan would export cars and import beef.
Australia does not have comparative advantage in car production. Hence, the equilibrium price is P* for quantity Q* in the car market. When there is free trade between Australia and Japan, Australia imports more cars due to lower cost of cars in Japan. Hence, the supply of cars increases resulting in the rightward shift of the supply curve from S1 to S2. Under free trade, the supply increases more than the demand and price falls to free market price P1. The domestic supply is Q1 and the imported quantity is Q2-Q1. The total supply is more than the equilibrium production Q* and price is below the domestic equilibrium price P*.
Initially the consumer surplus was the area AE*P* and producer surplus was P*E*B. when the supply increases with free trade, both the surplus increase. Due to lower price, consumer surplus increases and shown by the area AE2P1. Producer surplus increases due to increase in sales, and shown by the area P1E2B1.
As per figure 1, before trade, the equilibrium was at point E*, corresponding to price P* and quantity Q*. After trade happens, the quantity supply increases from Q* to Q2 and domestic price falls due to comparative advantage. It is evident from the above diagram, that before trade the total surplus (consumer surplus + producer surplus) was the sum of the two triangles, AE*P* and BE*P*, that makes the total surplus, shown as the triangle AE*B (Campbell and Brown 2016). After trade, as the supply curve shifts rightwards, the consumer and producer surplus both increased. The total surplus area became the triangle AE2B1. Thus, Australia definitely gains from the trade.
At free trade the supply curve was S1, and equilibrium market price is P*. The domestic demand is QD1 and domestic supply is QS1. The excess supply i.e. QD1 - QS1 is the amount of import at free trade. The area AE1P* is the consumer surplus and BE1P* is the producer surplus. Now, the government imposes a tariff (T) on the imported goods. After the imposition of tariff, the price rises from P* to PT by the amount of tariff T. Due to this price hike, domestic demand declined from QD1 to QD2. The new equilibrium is at E2, which is higher than the free trade equilibrium E1. The imposition of tariff increases the price of imported goods (Cruz and Bussolo 2015). Hence, the level of import decreases, shown by the quantity supplied QS2, and after tariff, the import is QD2 - QS2. Thus, the consumer surplus decreases, shown by the area AE2PT and producer surplus also decrease, shown as B2E2PT.
The total surplus is the total of consumer surplus and producer surplus. Before the tariff, the total surplus was shown by the area AE1B1. After the imposition of tariff, the price rises to PT and both the consumer and producer surplus decrease (Campbell and Brown 2016). The new surplus area is shown as AE2B2. Thus, Australia does not gain much from the imposition of tariff.
Campbell, H.F. and Brown, R.P., 2016. Consumer and producer surplus in cost-benefit analysis.
Cruz, M. and Bussolo, M., 2015. Does input tariff reduction impact firms' exports in the presence of import tariff exemption regimes?.
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university press.
Levchenko, A.A. and Zhang, J., 2016. The evolution of comparative advantage: Measurement and welfare implications. Journal of Monetary Economics, 78, pp.96-111.
To export a reference to this article please select a referencing stye below:
My Assignment Help. (2018). Advanced International Trade : Theory And Evidence Method. Retrieved from https://myassignmenthelp.com/free-samples/advanced-international-trade-theory-and-evidence-method.
"Advanced International Trade : Theory And Evidence Method." My Assignment Help, 2018, https://myassignmenthelp.com/free-samples/advanced-international-trade-theory-and-evidence-method.
My Assignment Help (2018) Advanced International Trade : Theory And Evidence Method [Online]. Available from: https://myassignmenthelp.com/free-samples/advanced-international-trade-theory-and-evidence-method
[Accessed 04 April 2020].
My Assignment Help. 'Advanced International Trade : Theory And Evidence Method' (My Assignment Help, 2018) <https://myassignmenthelp.com/free-samples/advanced-international-trade-theory-and-evidence-method> accessed 04 April 2020.
My Assignment Help. Advanced International Trade : Theory And Evidence Method [Internet]. My Assignment Help. 2018 [cited 04 April 2020]. Available from: https://myassignmenthelp.com/free-samples/advanced-international-trade-theory-and-evidence-method.
MyAssignmenthelp.com is the perfect solution to render quality solution for all sort of academic issues. We have hired professionals from different fields of study to provide assistance with different subjects. We successfully have provided different types of assignment solutions on 100+ subjects. We have hired industry experts to deliver nursing assignment, hr assignment and finance assignment help. To offer quality content with IT assignments, we have hired IT professionals to render programming language assignment help and IT assignment help for other types of IT assignments as well.
Answer: The rate of underutilization is the sum of unemployment and underemployment. For this reason, it can be said that the rate of underutilization will be higher compared to the rate of unemployment. Unemployment takes place when a person is actively searching for jobs and is unable to find any job. Unemployment can be measured by measuring the rate of unemployment where the people who are unemployed are divided by the number of peop...Read More
Answer: Introduction In this essay, the prospective effect of drought on macroeconomic equilibrium of Australia has been discussed. Drought indicates a dry climatic condition resulted from insufficient rainfall in a specific region. Drought affects an economy by influencing mainly supply side variables. Farms, business and common people are likely to suffer due to drought. Based on intensity the effect of drought might be local, regional or e...Read More
Answers: 1. The three main forms of unemployment are structural unemployment, frictional unemployment and cyclical unemployment. The first two represent natural unemployment while the third occurs due a decline in demand during recession. Structural unemployment The labor market suffers structural unemployment due to a shift in the economic structure creating divergence between skills that workers possess and the skills that employers...Read More
Answer: a. In a perfectly competitive market, firms are price taker as none of them can change the market price. New firms can enter into the market without any restrictions and each of them sells similar products. Therefore, each firm possesses a very small portion of the entire market. According to the characteristic of this market, each firm and each consumer has perfect knowledge of others (Cowell, 2018). If one of them change price then ...Read More
Answer: Workshop Question 1 The UNDP describes development on the basis of three essentials, which includes the ability for a country’s population to have long and healthy life, have a decent standard of living and quality education (Frugoli et al, 2015, p.370). Through the Human Development Index, a country’s overall well-being can, therefore, be easily measured. It’s a social measurement as it takes into consideration the...Read More
Just share your requirements and get customized solutions on time.
Our writers make sure that all orders are submitted, prior to the deadline.
Using reliable plagiarism detection software, Turnitin.com.We only provide customized 100 percent original papers.
Feel free to contact our assignment writing services any time via phone, email or live chat.
Our writers can provide you professional writing assistance on any subject at any level.
Our best price guarantee ensures that the features we offer cannot be matched by any of the competitors.
Get all your documents checked for plagiarism or duplicacy with us.
Get different kinds of essays typed in minutes with clicks.
Calculate your semester grades and cumulative GPa with our GPA Calculator.
Balance any chemical equation in minutes just by entering the formula.
Calculate the number of words and number of pages of all your academic documents.
Our Mission Client Satisfaction
Thank you so much for your efforts the solution was perfect and submitted on time.
every thing good and Very classy treatment. thank you very much i hope do my thesis with this web
The work was well present, details and met all expectations. This is a prove that I will always use this platform and recommend this site to friends at schools and family. Keep using great people to keep having users. Just after receiving this assign...
good transcript that it make feel good because i don\'t need to worry about no ideas to write this transcript