Question 1 - Definitions and Concepts

i. Define the terms Absolute Advantage (A.A.) and Comparative Advantage (C.A.) using an example related to your household.

ii. Using the concepts of Opportunity Cost (O.C.) and Comparative Advantage (C.A.), explain why a dentist might employ a less efficient (slower) dental nurse to carry out the tasks that the dentist may be more efficient (faster) at completing themselves?

Question 2 - Market Analysis

This question considers the impact of an import tariff on the markets for US steel and aluminium. This question does not require you to use actual data for your diagrams, but rather a general representation of this market. (Use the Insert → Shapes → Line feature in MSWord to draw and label your diagrams).

i. Draw a fully-labelled demand and supply diagram to represent the market for US domestic steel or aluminium under free-trade, where the domestic price (Pd) is above the World Price (Pw). Your diagram should include a title and be fully labelled.

Identify the areas of consumer surplus (CS) and producer surplus (PS) in your diagram by shading the specific areas or annotating your diagram with labels.

Briefly discuss who gains and who loses when this market moves from a state of autarky (no- trade) to a free-trade, importing market.

ii. Now consider the impact to this domestic steel or aluminium market of a tariff being imposed on imports of steel or aluminium. To do this analysis, copy the diagram you have used for (Q2 part i) and now impose a given tariff on imports. Again, your diagram should have a title and be fully labelled.

Identify the changes to CS and PS as well as any new areas or lost areas to market welfare that have arisen following the import tariff being imposed on this market.

iii. The last part of this question looks at some of the arguments policymakers might put forward to justify the imposition of trade restrictions and asks you to consider the counter-argument an economist might put forward.

List and briefly explain two (2) rationales for restricting international trade. Counter each justification for restricting trade with a brief economic response.

Question 3 - Broader policy implications

The preceding question is based on the standard analysis of international trade. Here we look at the broader implications of imposing an import tariff on the exporting nation(s) and consumers more generally.

i. Using a basic demand and supply diagram, show the likely effect that the imposition of an import tariff by the government of the importing nation might have on the exporting nation's domestic market for that commodity?

Your diagram should be fully-labelled and show the changes to equilibrium price and quantity. Briefly discuss your analysis.

ii. Other than the obvious benefits of free-trade enabling consumers to access goods and services more cheaply from overseas, discuss two (2) additional benefits free-trade brings to consumers?