Question

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Question

a-Imagine that Vietnam would close its trade in buttons with other countries. Would prices in Vietnam increase or decrease? (Hint: this depend on the size of the Vietnamese domestic demand).

b-Consider, again,. Assume that Vietnam maintains free trade in buttons but that its current output in this industry is zero due to competition from China.Now, the Vietnamese government decides to subsidise its button industry (this causes Vietnam’s supply curve to shift downwards). Will this be successful? What does it depend .

Consider, again,. Assume that Vietnam maintains free trade in

buttons but that its current output in this industry is zero due to competition from China.

Now, the Vietnamese government decides to subsidise its button industry (this causes

Vietnam’s supply curve to shift downwards). Will this be successful? What does it depend

Answer 1

Q A) If Vietnam would close its trade-in buttons with other countries the prices in Vietnam are dependent upon two scenarios

1. If the Vietnamese button industry is export-oriented then the price of the buttons will decrease as due to trade suspension the stock will pile up and supply will be more than demand in the domestic market which will lead to the decline in price.

2. If the Vietnamese button industry is import-oriented then the price of the buttons will increase as due to trade suspension the stock will diminish faster and supply will be less than demand in the domestic market which will lead to the increase in price.

Q B) Consider, again. Assume that Vietnam maintains free trade in buttons but that its current output in this industry is zero due to competition from China. Now, the Vietnamese government decides to subsidize its button industry (this causes Vietnam’s supply curve to shift downwards). Will this be successful? What does it depend on?

Ans) It depends upon the subsidy which government is giving

Case 1 - If the selling price of buttons is higher than the imported buttons then subsidizing the button industry in the presence of free trade policy is likely not to be successful as the consumer will prefer the low priced imported product over high price indigenous buttons.     

Case 2 - If the selling price of buttons is lower than the imported buttons then subsidizing the button industry in the presence of free trade policy will be successful as the consumer will prefer the low price indigenously developed product over high price imported buttons.

this scenario is applicable considering the neutral attitude of the consumer towards foreign and indigenously developed goods and the quality of buttons is the same for indigenous as well as imported buttons.