Tutorial 1 Q&As PDF

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tutorial 1 based on lecture 1 questions and detailed answers ...

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Prices and Markets Tutorial 1: Gaining fromTrading Economics is about how to allocate one’s resources for the best result. One of the most important issues for a country is what it should produce: What do you use your workers, land and machines for? Coffee is one of the most widely consumed beverages in Australia and therefore one of the most important traded goods. It is widely produced in countries with equatorial climates, like Brazil and Vietnam. Should Australia grow coffee? Let’s use some economic thinking to get to the bottom of this. Economists look at real issues through models and theory. These production possibilities frontiers (PPFs) show how many units of two products 1 worker can produce in one day in two countries. Units of Coffee beans is in the Y-axis and units of electronics produced is in the X-axis.

Vietnam

Australia

40

40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

0

5

10

15

20

25

30

0

0

5

10

15

20

25

30

Q1: What is Vietnam’ opportunity cost of producing (a) 1 unit of electronics and (b) 1 unit of coffee beans? Vietnam : a) opportunity cost/electronics=30/10=3 coffee beans b) opportunity cost/coffee beans=10/30=1/3 electronics Q2: What is Australia’s opportunity cost of producing (a) 1 unit of electronics, and (b) 1 unit of coffee beans? Australia: a) opportunity cost/electronics=40/30=3/4 coffee beans b) opportunity cost/ coffee beans=30/40=3/4 electronics

Q3: Which if any product(s) does Vietnam have an absolute advantage in? Which if any good (s) does Australia have an absolute advantage in? The producer that requires a smaller quantity inputs to produce a good is said to have an absolute advantage in producing that good Australia has an absolute advantage in production of both goods. Australia produces more coffee beans and electronics in 1 day (Vietnam does not have absolute advantage in the production of either good)

Q4: Assume Vietnam produces 15 coffee and 5 electronics units, and Australia produces 20 coffee units and 15 electronics units. -

The base for trade is comparative advantage Comparative advantage refers to the ability of a party to produce a particular good or service at a lower opportunity cost. Vietnam has a comparative adv producing coffee beans because Vietnam has a lower opportunity cost Australia has a comparative advantage producing electronics because Australia had a lower opportunity cost Imagine a situation where both countries fully specialize in the product, they have comparative advantage in. This will imply Australia produces 30 units of electronics and Vietnam producing 20 units of coffee beans. Now suppose Vietnam offers to trade 15 units of coffee to Australia for 6 units of electronics. For Australia to produce 15 units of coffee they will have to give up 10 units of electronics. Thus, the offer of 15 units of coffee of coffee for 6 units of coffee is profitable. Using similar reasons, we can also see Vietnam benefits from this offer, as long as the price of 15 units of coffee is between 5 and 10 units of electronics, specialization and trade is efficient

Can this situation be made more “efficient”, i.e. it is possible produce more together and then trade? As an trade advisor to the Australian government, what would you recommend these countries to do? Hint: Economists use theory! Look back at your lecture notes and identify and use the correct theoretical concept to help you answer....