Question

When Australia has a closed economy for flowers, a bouquet of flowers sells for $50. Assuming Australia does have the comparative advantage (CA) in the production of flowers, opening up the flowers market in Australia to international trade will result in Australian consumers being better off as the price of flowers will fall to below $50. Correct this statement and provide for a brief example proving your case.

Just need to state that with CA, international trade will increase prices for domestic consumers-explain with a brief example.

Answer 1

In the given case, Australia has a comparative advantage in the production of flowers.

This means Australia, when it will open to international trade, will specialize in the production of and export flowers.

This means for the producers of Australia, the focus will shift from domestic consumers to foreign consumers. They will prefer to supply flowers to foreign nations and make higher export income, than supply to domestic consumers.

Thus, supply of flowers to domestic consumers will fall, shifting the supply curve of flowers in the domestic market to the left. This will lead to an increase in the price of flowers for domestic consumers.