- Opportunity cost for diamonds;
- Opportunity cost for pearls;
- Alpha has a comparative advantage in the production of diamonds against the production of pearls.
- Beta has a comparative advantage in the production of diamond.
- Both countries should focus their production on the product with which each has a comparative advantage, i.e., Alpha focus on the production of pearls and Beta production of diamonds. The two should engage in international trade and exchange goods on which each has a comparative advantage with which they are disadvantaged.
- Tariffs are taxes imposed by the host nation for import goods. It ranges over the general cost for good and, it is passed over to the consumer’s hence high commodity prices. They discourage business selling product in a foreign country. An additional price makes import prices very high hence quantity demanded decreases. This benefits domestic producers who face reduced market competition hence low supply.
- Governments impose trade tariffs and quotas with the aim of protecting young and developing industries from international competition. Governments impose them because there is an increase in revenue as products enter the domestic market. Domestic industries enjoy reduced competition because of the inflated prices of imports. This enhances the domestic market for domestically produced goods. A boost in the local market enhances employment which necessitates an economy shift from relying on agricultural products to finished goods.
- Counties which engage in international trade do so in a manner that each county specializes in the production of a good which it has a comparative advantage over the other. This enables counties to engage in international trade allowing expansion of global consumption possibilities.
However, a country can fully specialize in production because at some point government intervenes to come up with trade blocks which limit the number of goods traded. For example, a restriction can be for the safety of the citizens or promotion of local skills through infant industries. The implication of trade barriers hinders the economy from reaching the most efficient resource allocation.
- There exists a mutual relationship between trade and exchange rate. An economy should strive to lower their exchange rate because the exchange rate volatility leads to increased international trade with lower risk and transaction costs associated with exchange rate variability. Keeping exchange rates low makes it cheaper to buy goods from that currency host nation hence it stimulates her economy causing a surge in demand for goods and services. Low values of exchange currency make it expensive to buy foreign goods to citizens of host nation.