Question

When Australia has a closed economy for flowers, a bouquet of flowers sells for $50. Assuming Australia does not have the comparative advantage in the production of flowers, the opening up the flowers market in Australia to international trade will result in Australian consumers being worse off as the price of flowers will exceed $50. Correct this statement and provide for a brief example proving your case.

Just need to state that with no comparative advantage, international trade will lower prices for domestic consumers-explain with a brief example.

Answer 1

When there is absence of comparative advantage there is an absence of efficiency by any one player making all players in market better off and creates level playing field and thus induces competition which creates wafer thin matgins. As results of this internationalisation and foreign direct investment into closed economy the competition rises causing multiple price cuts and stiff margins and hence prices loosen and reduce for domestic consumers. Companies here compete with price cuts and price bundling reducing overallmarket prices and creating perfect competition and low entry barriers.