(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 assumptions behind the law of comparative cost advantage
Explanation
(a) A tariff is a tax imposed on goods imported into a country
(b) i. The law of absolute cost advantage states that a country should produce and export those goods in which it has an absolute advantage over its trading partners and imports those goods in which it has an absolute disadvantage compared with its trading partners.
ii. The law of comparative cost advantage states that a country should produce and export those goods in which it has a Comparative advantage and import those goods in which it has a comparative disadvantage.
(c) i. There are only two countries in the world each producing and consuming only two goods.
ii. Labour is the only factor of production and they are of uniform quality within each country.
iii. There is perfect mobility of labour within each country whereas labour cannot move freely between the two countries.
iv. Costs of production are Constant. The costs remain the same whatever the quantities produced.
v. There are no costs of transportation.
vi. There is full employment in each country. As a result, to produce more of one product will entail forgoing Some quantity of the other product.
vii. There are no trade barriers between the two countries.