Question

Use the following for questions 3-4. Consider two countries, Australia and Trinidad. Both are island economies endowed with major fishing resources and moderate climates. For simplicity, imagine that both countries have two industries: tourism and fishing. For the history of the country Australia has been open to free trade. Currently, Trinidad is closed to trade – there are no tourist visitors and no exported (or imported) fish.

3. The current market price and quantity of fish in Trinidad would be

A) affected by the world price

B) inefficient since the world price could possibly be lower

C) efficient if it is below the world price

D) efficient if the market clears (ie – no local government intervention)

E) none of the above

4. According to traveler.com most international tourists come from the US, Norway, Denmark, and Britain. If Trinidad is much closer in proximity to these nations than Australia, what is a possible outcome(s) once tourism in Trinidad is allowed?

A) Some workers in Trinidad will shift from fishing to the tourism industry.

B) Trinidad may import fish from countries like Australia.

C) Citizens of Trinidad will be better off.

D) All of the above

E) A&B only

Answer 1

Solution:

3. Since Trinidad is currently a closed economy, it will not be affected by the rest of the world, and the world price in any way. This directly eliminates the first three options. Moreover, being unaffected by the world price, if the market clears in the country giving the equilibrium, that is demand equals the supply, this gives an efficient outcome as there will not be any dead weight loss per se and this equilibrium would be the best outcome without any government intervention.

So, correct option is (D) efficient if the market clears (i.e., no local government intervention)

4. If Trinidad is much closer to the mentioned countries as compared to Australia, and since the two island economies are very much similar, opening tourism in Trinidad would make a huge inflow of tourists from these countries. With such huge tourism, this sector/industry will become more profitable, resulting in some workers shifting from fishing to tourism. Furthermore, Trinidad will be relatively better in tourism than Australia, so as trade suggests, it should specialize in tourism, ending up importing fish. This all will make citizens of Trinidad better off

So, correct option is (D) All of the above