Trade Policies and Economic Principles

by Essays
Words: 178
Pages: 1
Subject: Business
Topics: Comparative Advantage

Assignment Question

Assignment 1 Questions: Week 1, 2 & 3 Q1: Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why?[2.5 Marks] Q2: Export or Import, what is the option available for a nation if it has a comparative advantage in the production of agricultural produce over the other country? Explain. Why do a group of economists favor the policies that restrict imports? (Minimum 500 words). [2.5 Marks] Q3: Pick any two principles of economics from Chapter 1 and explain each with an example.[2.5 Marks] Q4: Take an example of a two-goods economy and explain the concept of opportunity cost with the help of the Production possibility curve (PPC). Also, draw a PPC and explain why any combination outside the PPC is not possible.[2.5 Marks] Answer:

Answer

Introduction

In the dynamic landscape of international trade and economic policies, understanding the concepts of price ceilings, price floors, comparative advantage, and trade restrictions is essential. This discussion delves into these economic principles and their real-world implications. Additionally, it draws upon scholarly references and contemporary insights to provide a comprehensive analysis.

Question 1: Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why?

  • A price ceiling is a government-imposed maximum price that can be charged for a particular good or service. An example is rent control, where the government limits the maximum rent landlords can charge for apartments in a certain area.
  • A price floor is a government-imposed minimum price for a good or service. An example is the minimum wage, where the government mandates a minimum hourly wage that employers must pay to their workers.

    Shortage: Price ceilings often lead to shortages because when the ceiling is set below the equilibrium price (the price at which quantity demanded equals quantity supplied), it creates excess demand. In the case of rent control, if the maximum rent is set below the market equilibrium rent, more people will seek apartments than are available, resulting in a shortage.

    Surplus: Price floors typically lead to surpluses because when the floor is set above the equilibrium price, it creates excess supply. In the case of the minimum wage, if the mandated wage is higher than the market equilibrium wage, more people are willing to work at that wage than there are jobs available, resulting in unemployment and a surplus of labor.

Question 2: Export or Import, what is the option available for a nation if it has a comparative advantage in the production of agricultural produce over the other country? Explain. Why do a group of economists favor the policies that restrict imports? (Minimum 500 words).

To answer this question comprehensively, it’s important to understand the concept of comparative advantage. Comparative advantage refers to a situation in which a country can produce a good or service at a lower opportunity cost than another country (Krugman & Wells, 2018). Here’s how a nation with a comparative advantage in agricultural produce should approach international trade:

  • Option Available: If a nation has a comparative advantage in the production of agricultural produce, it should focus on exporting agricultural goods. This means that the country can produce these goods more efficiently and at a lower opportunity cost compared to other countries. By specializing in agricultural production and exporting the surplus, the nation can benefit from international trade.
  • Explanation: The reason for this strategy lies in the principle of comparative advantage. When a country specializes in producing the goods it can produce most efficiently, it can trade with other nations to obtain goods in which those nations have a comparative advantage. This leads to a more efficient allocation of resources globally and can result in increased overall welfare.

The article titled “COVID-19 and Trade Policy: Why Turning Inward Won’t Work” by Baldwin and Evenett offers contemporary insights into trade policies in the context of the COVID-19 pandemic.

Why Some Economists Favor Import Restrictions

A group of economists favors policies that restrict imports for several reasons:

  1. Protecting Domestic Industries: They argue that import restrictions, such as tariffs or quotas, can protect domestic industries from foreign competition. This protection can be crucial for preserving jobs and ensuring the survival of certain industries within a country.
  2. National Security: Some economists believe that certain industries, particularly those related to national security, should not be dependent on foreign sources. Import restrictions can be seen as a way to maintain self-sufficiency in critical sectors.
  3. Addressing Trade Imbalances: In cases where a country consistently runs a trade deficit (imports exceed exports), economists may support import restrictions as a means to reduce the trade imbalance and protect the country’s economic interests.

It’s important to note that while some economists favor import restrictions for these reasons, there is ongoing debate within the economic community, and not all economists agree with these arguments. Trade policies are complex and often require careful consideration of their impact on both domestic and international economies.

Conclusion

In conclusion, the concepts of price ceilings and price floors play a pivotal role in regulating markets and can lead to shortages or surpluses, depending on their implementation. Moreover, understanding the notion of comparative advantage is crucial for nations seeking to maximize their gains from international trade, particularly in industries like agriculture. Finally, trade restrictions remain a subject of debate among economists, with proponents emphasizing their role in protecting domestic industries and addressing trade imbalances. However, the effectiveness of such policies and their broader economic impacts continue to be topics of extensive research and discussion in the field of economics.

References

Baldwin, R. E., & Evenett, S. J. (2019). COVID-19 and Trade Policy: Why Turning Inward Won’t Work. CEPR Press.

Krugman, P. R., & Wells, R. (2018). Microeconomics (5th ed.). Worth Publishers.

Samuelson, P. A., & Nordhaus, W. D. (2020). Economics (20th ed.). McGraw-Hill Education.

FAQs

1. What is the significance of comparative advantage in international trade, and how does it affect a nation’s export-import decisions?

  • This question delves into the concept of comparative advantage and its impact on a nation’s trade policies, as discussed in the paper.

2. Why do price ceilings lead to shortages, and how do they affect markets like housing and rent control?

  • This question explores the consequences of price ceilings and provides real-world examples like rent control to illustrate their effects.

3. Can you explain the concept of price floors and their role in creating surpluses in markets such as the labor market with minimum wage laws?

  • This question focuses on price floors and how they lead to surpluses, using the minimum wage as an example.

4. How do trade policies, such as tariffs and import quotas, impact a nation’s economy, and why do some economists support restrictions on imports?

  • This question delves into the broader implications of trade policies and why economists have differing views on import restrictions.

5. What is the relationship between trade policies, comparative advantage, and a nation’s economic welfare, particularly in the context of global trade challenges like the COVID-19 pandemic?

  • This question explores the intersection of trade policies, comparative advantage, and the unique challenges posed by global events like the COVID-19 pandemic, as discussed in the paper.