Question

The Scenario :

Suppose that the market for good X is small in Malaysia and in Thailand , relative to the world market for good X . Both these markets are currently open to free trade . Suppose also that , relative to the rest of the world , Malaysia has a comparative advantage in producing good X whilst Thailand has a comparative disadvantage in producing good X. Malaysian consider good X a normal good , whereas Thais consider good X an inferior good .

The Question :

Using a set of appropriate diagrams ( with demand and supply curves ) , show the comparison between the Malaysian and Thai markets for good X (side by side) - when an economic recession hits both Malaysia and Thailand simultaneously . Explain what happens to the price of good X in each country , as well as the quantity demanded , quantity supplied , and quantity imported/exported . make sure that you include welfare tables and briefly explain the welfare effects on consumers , producers and society as a whole - for each country, as a result of the economic downturn.

Answer 1

Good X is a normal good in Malaysia. Therefore during recession, its demand decreases and price of the good fell. Since the good X has large world market, the quantity of good export will increase. (P1,D1,Q1)

Good X is inferior good in Thailand. Therefore during recession, demand for goods would increase during as incomes fell. People are poorer, so they demand more inferior goods. This makes the prices and quantity of inferior goods to rise. This would be a good time to be a producer in the inferior goods market. Import and export increases. (P2,D2,Q2)

Welfare effects:

Malaysia :

1. For consumers - since they have less money to pay, consumers shift their demand from one good to another.
2. for producers - they produce another good since X's demand decreases, exports the existing good X to high demand countries.
3. for society - as a whole society doesn't welfare much in this case

Thailand :

1. for consumers - demand increases for good X
2. for producers - get more profit, and more production of good X
3. for society - society welfare as a whole improves, as both producers and consumers meet their demands in an affordable way.