Question

6a. What is meant by the equilibrium relative commodity price of a nation in isolation?

b. How is this price determined in each nation?

c. How does it define the nation’s comparative advantage?

Answer 1

Answer 6 a :Meaning of Equiliburm Relative Commodity Price of a Nation in isolation :

In absence of trade , the relative commodity price at which the country should maximised the welfare. It is the price where the country have been maximised there welfare of the people. It isdetermined by the slope of tangent between production possibility fronitor and indiiference curve at the isolstion point of production of an nation and there is summation indifference curve of whole nation.

As we know relative commodity price in isolation means that comparsion between two goods price of the same nation. It equiliburm has been determined by two different variables such as production and demand of the diiferent commodity.

(b) The price has been determined by the slope of the production i.e supply where as nation indifference curve i.e demand Price of each nation has been different it has can determined by the relative price of two commodity

Example :

Price of Nation 1 can be determined by

P₁= Price of Good X / Price of Good Y

Price of Nation 2 can be determined by

P₂ = Price of Good X / Price of Good Y

Here, price of both nation are different in case of isolation where as when there is trade adjusted price has been determined so no one can harm from it.

Answer c : As we know comparative advantage means specialisation or less cost incurred in producing something as compare to other nations.

Example :

Suppose that price of the commodity Good Y in Nation 1 is $1 and Nation 2 is $6where as price of Commodity Good Z in Nation 1 is $6 and Nation 2 is $1.

P₁ = P_Y/ P_z = 1/6where as P₂= P_Y/ P_Z = 6/1

P₁< P₂

So, Nation 1 has comparative advantage in commodity Y where as Nation 2 has comparative advantage in commodity Z