Question

TQ02 - Ricardian model

1. In the simple Ricardian model international trade is based on comparative advantage. What is the explanation for this? What benefits does international trade have given that it is based on comparative advantage?

2. We know that in a country the relative price of a product have increased as a result of international trade. Does this country export or import this product? Explain your answer!

TQ05 - Trade policy

1. If a country imposes a tariff in some goods, how do domestic prices change and what explains the change in domestic prices?

2. Imposing a tariff on imports improves welfare in some specific cases only. Which are these cases and what leads to the positive welfare effect?

TQ08 – Fiscal and monetary policies

1. Temporary fiscal policy tends to appreciate the domestic currency. What explains this?

2. Permanent monetary policy tends to depreciate the domestic currency. What explains this?

Answer 1

TQ02-

1. As per Ricardian model of international trade we assume between two nation with only one factor of production as labor one country will have comparative advantage in one product where as the second country will have in other and they can mutually benefit by increasing their output and trading by only manufacturing the product they have comparative advantage in. Trade will increase the total output and Consumption and will make both countries better off then without trade.

2. Since the relative price have increased this represents that the country export the product and domestic prices have increased because of supplier start exporting the product leading to shortage in domestic market

TQ08-

1. If the country imposes tariffs then the domestic prices are expected to rise since the imports become lot more costlier as well as this will also allow domestic producer to raise prices

2.Tariffs increases the welfare if the industry is in nascent stage and this allows the industry to grow and develop in the nation as well as the expected benefits to the society as a whole by industry in future overcome the higher cost consumer is supposed to pay currently.Also in case of essential commodities it is essential to allow domestic companies to grow in interest of national security