Explain the difference between absolute advantage and comparative advantage. Calculate the opportunity cost of producing each product in each country.

Explain the difference between absolute advantage and comparative advantage.
Absolute advantage refers to a country's ability to produce a good using fewer inputs or more efficiently than another country. Comparative advantage, on the other hand, refers to a country's ability to produce a good at a lower opportunity cost than another country.

The table below shows two countries producing both goods with the given resources.

(Show your working out in the box)

Explain the effect of tariff on prices and quantity of goods and services demanded and supplied.
(Use the appropriate graph to help you explain and label the graph correctly)

A tariff is a tax imposed on imported goods. When a tariff is imposed, it increases the cost of bringing foreign goods into the domestic market.

• Effect on Price: The price of imported goods in the domestic market will increase by the amount of the tariff, or close to it. This also tends to raise the price of domestically produced goods that compete with the imports, as domestic producers can now charge more without being undercut by cheaper imports.
• Effect on Quantity Demanded: As the price of goods and services increases due to the tariff, the quantity demanded by consumers in the domestic market will decrease, following the law of demand.
• Effect on Quantity Supplied: The higher domestic price incentivizes domestic producers to increase their production, leading to an increase in the quantity supplied by local firms. Conversely, the higher cost for importers leads to a decrease in the quantity of imported goods supplied to the domestic market.

Graphical Representation:
Imagine a standard supply and demand graph with Price on the y-axis and Quantity on the x-axis.

1. Draw a downward-sloping Domestic Demand curve ($D_D$) and an upward-sloping Domestic Supply curve ($S_D$).
2. Initially, assume a World Price ($P_W$) that is below the domestic equilibrium price. This $P_W$ line is horizontal, representing perfectly elastic supply from the world market.
3. At $P_W$, domestic consumers demand $Q_{D1}$ units, and domestic producers supply $Q_{S1}$ units. The difference, $Q_{D1} - Q_{S1}$, represents the quantity of goods imported.
4. When a tariff ($t$) is imposed, the effective price for imports rises to $P_{W+t} = P_W + t$. Draw a new horizontal line at $P_{W+t}$ above $P_W$.
5. At the new higher price $P_{W+t}$, domestic consumers demand a lower quantity, $Q_{D2}$.
6. At $P_{W+t}$, domestic producers are incentivized to supply a higher quantity, $Q_{S2}$.
7. The new quantity of imports will be $Q_{D2} - Q_{S2}$, which is less than the original imports. In summary, the graph would show the price level rising from $P_W$ to $P_{W+t}$, the total quantity consumed falling from $Q_{D1}$ to $Q_{D2}$, domestic production increasing from $Q_{S1}$ to $Q_{S2}$, and imports decreasing.