(a) Define tariff. (b) State the following laws: i. The law of absolute cost advantage: ii. The law of comparative cost advantage. (c) Outline any four assu...

Answer Details

(a) A tariff is a tax imposed by a government on goods that are imported into a country from other countries. The purpose of a tariff is to protect domestic industries by making foreign goods more expensive and less competitive in the local market.

(b)

1. The law of absolute cost advantage states that a country can produce a particular good more efficiently than any other country. Therefore, it should specialize in the production of that good and trade it for other goods that other countries produce more efficiently.

2. The law of comparative cost advantage states that even if a country is less efficient at producing all goods, it should still specialize in producing and exporting the goods in which it has a comparative advantage (i.e., it has a lower opportunity cost of producing that good compared to other goods it could produce). By doing so, it can benefit from trade with other countries that have different comparative advantages.

(c)

The four assumptions behind the law of comparative cost advantage are:

1. The law assumes that there are two countries and two goods. This simplification allows for a clear comparison of the opportunity costs of producing each good in each country.

2. The law assumes that resources are perfectly mobile within each country, but not between countries. This means that labor and capital can move freely within a country, but cannot move between countries.

3. The law assumes that there are no transportation costs or trade barriers, such as tariffs or quotas, that would hinder trade between countries. This allows for the assumption of perfect competition in the global market.

4. The law assumes that there are no externalities or spillover effects from the production of each good. This means that the production of one good does not affect the production or consumption of other goods or impact the environment or society in any way.