ECON 1B03 Lecture Notes - Economic Surplus, West Bank Areas In The Oslo Ii Accord, Comparative Advantage

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whitetiger625

27 Apr 2013

School

McMaster University

Department

Economics

Course

ECON 1B03

Professor

Bridget O' Shaughnessy

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ECON 1B03 Full Course Notes

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The world price of a good is one that prevails in international markets for the good and is assumed to be constant. If the world price is higher than the domestic price, then the country would become an exporter when free trade is allowed. After free trade, the domestic price would have to rise to equal the world price. The higher price would reduce domestic consumption and increase domestic production, leading to surplus production being exported. The ultimate reason why the country becomes an exporter is that it has a comparative advantage in producing that product. Without free trade, a lower domestic price as compared to the world price implies that the cost of producing that product in that country is lowerrelative to the rest of the world, creating the comparative advantage. If the world price is lower than the domestic price, then the country would become an importer when free trade is allowed.

Related Questions

Suppose the market for oranges in a small country is closed to international trade. The domestic price is $3 per lb, at which 10,000 lbs are bought and sold in the country, while the world price is $4 per lb. If the country opens up to free trade with the world, the domestic quantity demanded at the world price will be 8,000 lbs, and the domestic quantity supplied at the world price will be 12,000 lbs.

A. Which of the following statements is true?

a. The country will become an importer of oranges because it has a comparative advantage in the production of oranges

b. The country will become an exporter of oranges because it has a comparative advantage in the production of oranges

c. The country will become an importer of oranges because the world has a comparative advantage in the production of oranges

d. The country will become an exporter of oranges because the world has a comparative advantage in the production of oranges

B. At what price (per lb.) will oranges be bought and sold in the country after opening up to trade?

a. $3

b. $4

c. $3.5

C. After opening up to trade, the level of exports/imports for the country will be:

a. 8,000 lbs.

b. 12,000 lbs.

c. 10,000 lbs.

d. 4,000 lbs.

D. How much (in $) is the net gain from trade for this country in opening up to free trade?

coralbadger702

A country has a comparative advantage in a product if the world price is

a) not subject to manipulation by organizations that govern international trade.

b) equal to that country's domestic price without trade.

c) lower than that country's domestic price without trade.

d) higher than that country's domestic price without trade

periwinkleraccoon781

1. An import tariff

a. lowers the domestic price of the exported good below the world price.

b. keeps the domestic price of the exported goods the same as the world price.

c. raises the domestic price of the imported good above the world price

d. lowers the domestic price of the imported good below the world price.

2. Which two accounts are included in the balance of payments:

a. current account and the reserve account.

b. current account and the trade account.

c. current account and the capital account.

d. trade account and the capital account.

3. A producer has a comparative advantage in the production of a good when the producer:

a. has a production cost that is less than sales revenue.

b. has the highest cost of production compared to any other producer.

c. is comparatively more efficient at producing the good than it is at producing anything else.

d. specializes through the use of an assembly line.

4. According to the Fischer effect, if the "real" rate of interest in a country is 4 percent and expected annual inflation is 9 percent, the "nominal" interest rate will be _____.

5 percent

B.	13 percent

9 percent

36 percent

bluetortoise611

ECON 1B03 Lecture Notes - Economic Surplus, West Bank Areas In The Oslo Ii Accord, Comparative Advantage

ECON 1B03 Full Course Notes

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