University Economics Assignment: Trade Theories and Consumer Behavior

This economics assignment explores several key concepts in international trade. It begins by evaluating the argument that free trade benefits strong economies, then examines the reasons governments use tariffs and quotas to restrict trade. The assignment defines and differentiates between absolute and comparative advantage, highlighting their significance in international trade. Finally, it uses indifference curve analysis to explain how and why a consumer's relative consumption of two goods changes when the price of one good rises. The solution provides a comprehensive understanding of international trade principles and consumer behavior, supported by relevant economic theories and examples.

Running head: ECONOMICS
Economics
Name of the student
Name of the university
Author note

Answer 1
In case of free trade the firms can export as well as import goods without any kind of tariff
barriers. When there is free trade it is known to lower the price and also helps in increasing the
rate of exports and imports in the country. Free trade can lead to both winners as well as winners
in the economy. However, the statement free trade is beneficial to a country if it is strong
enough to stand up to foreign competition is always not true since each should be specializing
and producing that good only in which it have the absolute advantage over the others.
Although it can never be beneficial for those firms which are uncompetitive in nature.
Therefore, in that case they might lose out to the cheaper imports. There is high chance that
the workers lose jobs in these kind of uncompetitive industries. The free trade is termed as the
trade policy which does not restrict the imports or exports. The advantages of the free trade
includes international specialization, rise in the world production as well as consumption,
safeguard against the monopolies, benefits to the consumers as they have more option of
goods to choose from and large amount of efficiency along with the optimum utilization of
resources.
Therefore, in that case they might lose out to the cheaper imports. There is high chance that
the workers lose jobs in these kind of uncompetitive industries. The free trade is termed as the
trade policy which does not restrict the imports or exports
Answer 2
Though the gains from trade for a country might be strong, the governments are known to reduce
trade with quotas and tariffs in order to protect the domestic industries. Tariffs are often imposed
on the imported goods in order to protect the infant industries. Tariffs and quotas are termed as
the trade protectionism of the country. One of the reason is protection of the domestic
employment. If the domestic industries of the country is known to struggle to compete against

the international competitors, the government will be using tariffs for competing against the
international competitors. Tariffs and quotas are most commonly used for protecting the early
stage of the domestic industry from the international competition. In this case, the tariff is
known to act as an incubator that will provide the domestic industry the ample time for
developing and growing into competitive position. Another reason of trade protectionism is the
barriers which are known to be employed by the developed countries. The defense industries are
often viewed as one of the most important part of the state interest and also enjoys significant
level of protection. Countries might also known to set tariffs which acts as a retaliation technique
when they think that a trading partner has not played any of the rules. The government might
also use tariffs for diminishing the consumption of international goods whch do not adhere to
certain standards to the economy.
Answer 3
The principle of the absolute advantage refers to the ability of a party for producing a greater
quanity of goods or services compared to the competitors by using the similar amount of
resources. The comparative advantage on the other hand is the ability of the individual or groups
for carrying out a particular economic activity more efficiently compared to the another activity.
“ The essence of Ricardo’s argument is that international trade does not require different
absolute advantages and that it is possible and desirable to trade when comparative
advantages exist” (Appleyard, Field. and Cobb 2016); The law of comparitive advantage is
known to hold under the free trade where an agent will be producing more of and will be
consuming less of a good for which they will be having comparative advantage. In case of the
absolute advantage one entity is known to manufacture a product at a very high quality and also
at a faster rate for the greater profit of business. On the other hand, the comparative advantage is

known to differ in that way that it takes into consideration the opportunity cost which is known
to be involved while choosing to manufacture various types of goods with the limited amount of
resources. When the nation can make a product at a much higher quality with faster rates than
the other, it is termed as absolute advantage. .” A comparative advantage exists whenever the
relative labor requirements differ between the two commodities. This means simply that,
when the relative labor requirements are different, the internal opportunity cost of the two
commodities is different in the two countries” (Appleyard, Field and Cobb 2016).While the
comparative advantage is purely based on the opportunity cost. When one of the nation has a
lower opportunity cost than the other, then it is termed as comparative advantage,.
Answer 4
The indifference curve is known to connect the points on a graph which is known to represent
two quanities of goods. When the price of X falls, the consumers are known to shift to a new
point of equilibrium at a high indifference curve. Suppose price of good X falls, price of Y and
his money income remaining unaltered, so that budget line is now PL2. The new budget line is
PL , this means that he will be in equilibrium at R on indifference curve IC2, there will a line AB
is drawn parallel to PL1 so that it is known to touch the indifferences curve IC2 at S.
Income effect attributes how a change in the consumer’s income influences his total satisfaction.
When the price of goo X rises, people will switch to good Y and will substitute Y for X. as the
price of good X rises but the price of good Y remains same. As good X becomes expensive in
nature. Consumers will be switching to good Y. This method is called substitution effect. The
substitution effect states that people tend to consume that good whose price will fall provided
that good is the substitute of other.

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