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 the 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

We have a picture to the left for Malaysia and a picture for Thailand to the right.

Prior to the economic crisis.
Pw 's global price.
Malaysia graph.
Initial equilibrium is E1

As Malaysia exports the nice, global prices are higher than balanced prices. The quantity requested is O Q1 and theamount given is O Q2 at Pw price. We therefore have Q1 Q2 exports.

The surplus producer is O C Pw
Consumer surplus is A F Pw

Thailand graph.
Initial equilibrium is E1.
As an importer of the good, Thailand is below the balanced price.
The quantity requested for Pw is O Q2 and the quantity given is O Q1.

So imports from Q1 Q2 are available.
O H Pw is the producer excess
A surplus of consumer is A G Pw

After economic recession.
The slump allows income levels to drop. The recession faces all countries. Thus, the incomes of people in both nations are declining.

Graph of Malaysia.

Strong X is a good normal good for Malaysia.

In the case of ordinary commodities, the market for the commodity reduces as revenue falls. We then shift the demand curve to the left

from D1 to D2, which suggests a decrease in demand.

The equilibrium moves between E1 and E2. The quantity required is decreasing. The necessary quantity is now O Q3. In world price Pw, there is no improvement. The volume supplied is then O Q2.

We can see that exports are now growing. Q3 Q2 is now exporting.

B G Pw is the latest market surplus , OC Pw is the same producer surplus

Graph in Thailand.

Strong X is a lower strong for Thailand.
When income declines, demand for the good increases in the case of the lower products.
So we have a right-wing change of the market curve from D1 to D2.

The equilibrium moves between E1 and E2.
The quantity required is growing. The necessary quantity is now O Q3. In world price Pw, there is no improvement.

The supplied number is then O Q1.
We can see that imports are now growing. Q1 Q3 is now imported.

B F Pw is the latest market surplus , O H Pw is the same producer surplus

Welfare table.