What are the two reasons for trade?

Here are the answers to your questions:

Question 12:
The two main reasons for trade are:

1. Differences in resource endowments: Countries possess varying amounts of natural resources, labor, and capital, leading to different production capabilities.
2. Differences in comparative advantage: Countries specialize in producing goods and services where they have a lower opportunity cost, allowing for more efficient global production.

Question 13:

• Absolute advantage refers to a country's ability to produce more of a good or service using the same amount of resources, or the same amount using fewer resources, compared to another country. It's about being more productive in absolute terms.
• Comparative advantage refers to a country's ability to produce a good or service at a lower opportunity cost than another country. It's about specializing in what a country does relatively best, even if it doesn't have an absolute advantage in any good.

Question 14:
Given the production data:

Product	Papua New Guinea	Australia
Wheat	200	400
Rice	400	800

• a. To determine which country has an absolute advantage in producing rice, we compare their production figures. Australia produces 800 units of rice, while Papua New Guinea produces 400 units.

  • Australia produces more rice.
  • The country with an absolute advantage in producing rice is Australia.

• b. To determine comparative advantage, we calculate the opportunity cost for each country for each product.

  • Papua New Guinea (PNG):
    • Opportunity cost of 1 unit of Wheat = $\frac{400 \text{ Rice}}{200 \text{ Wheat}} = 2$ units of Rice
    • Opportunity cost of 1 unit of Rice = $\frac{200 \text{ Wheat}}{400 \text{ Rice}} = 0.5$ units of Wheat
  • Australia:
    • Opportunity cost of 1 unit of Wheat = $\frac{800 \text{ Rice}}{400 \text{ Wheat}} = 2$ units of Rice
    • Opportunity cost of 1 unit of Rice = $\frac{400 \text{ Wheat}}{800 \text{ Rice}} = 0.5$ units of Wheat

  Since the opportunity costs for both wheat and rice are identical for both countries, neither Papua New Guinea nor Australia has a comparative advantage over the other in either product based on these figures.

  • PNG has comparative advantage in neither product.

Question 15:
The benefits of free trade on:

• a. Price: Decrease (due to increased competition and efficiency).
• b. Supply: Increase (due to access to a wider range of international producers).
• c. Level of employment: Increase (in export-oriented industries and overall due to economic growth, though some sectors may experience job losses).

Question 16:
The effects after a tariff is imposed:

• a. Price of goods and services in the domestic market: Increase (tariffs raise the cost of imported goods, which can also lead to higher prices for domestic substitutes).
• b. Supply of locally produced goods and services: Increase (domestic producers face less competition from imports, encouraging more local production).
• c. Demand for goods and services in the domestic market: Decrease (higher prices reduce consumers' purchasing power and overall quantity demanded).
• d. Supply of imported goods and services: Decrease (tariffs make imports more expensive and less attractive, reducing their supply).
• e. General level of consumption in the economy: Decrease (higher prices and reduced real income lead to a lower overall level of consumption).