Economics for Business Advanced International Trade

Question: Discuss about the Report of Economics for Business and Advanced International Trade. Answer: Tax on Alcohol The increase in the tax on alcohol is the most effective and inexpensive way to reduce the alcohol related harm as well as the too much consumption. Hence, it is completely agreed that raising the tax on alcohol is the most effective way to reduce alcohol abuse in our society. The consumption of alcohol is classified as the effective form of market failure. Hence, the consumption of alcohol is causing negative spillovers in utilization. The over-consumption of alcohol is leading to increase in the number of individuals who are drunkenness. As a result, the alcohol abuse is increasing in the society. Hence, the minister is correct regarding the raising of the tax on alcohol that will be directly proportional to the social cost (Daley et al. 2012). The externality will be internalized by the tax that will make the customers pay. The increase in the tax will lead to the fiscal disincentive for the consumption of alcohol. The increase in the tax will reduce the purchasing power of consumption. As a result, the alcohol abuse will also get reduced as it will prevent the customers from getting dangerously drunk. On the other hand, the government will gain more taxes in the form of subsidies. The high imposition of tax will also prevent the occurrence of accidents. Figure 1: The increase in the Tax on alcohol (Source: Created by Author) The above graph shows that the imposition of the tax on the alcohol will reduce the negative externality of consumption. The main objective of the government is to reduce the marginal private benefit (MPB) curve by shifting it back towards the Marginal social benefit (MSB) curve. This will lead the consumption of alcohol to reduce to the socially most favorable level. As a result, the quantity of the alcohol will reduce from Q to Q2. The imposition of the tax on the marginal private cost (MPC) will shift the curve towards marginal social cost (MSC). The shift in the curve towards MSC will lead to the increase in the price from P1 to P2. As a result, the raising of the tax will reduce the use of alcohol and the alcohol abuse in the society (Fogarty 2013). Absolute and Comparative Advantage Absolute and comparative advantages are two most vital international trade concepts that mainly influence the fact that how and why a nation dedicates the limited resources to the production of a particular product. The productivity of different makers or economies is compared with the help of the absolute advantage. If a producer or a maker produces a particular good with the help of smaller amount of inputs are said to have an absolute advantage in producing that good (Schumacher 2012). Absolute advantage is the situation that takes place in a comparative advantage theory. In the real world, some countries are more competent in producing a particular good as compared to some other countries. Country Mango/units produces per unit of time Orange/ units produces per unit of time Country A 6 30 Country B 18 4 In the above table, it can be seen that the country A possesses an absolute advantage over orange whereas country B possesses an absolute advantage over mangoes. As a result, the countries should specialize and trade. It can be thus concluded that country A will not be able to produce as many mangoes as compared to country B. In the same way, country B will not be able to produce as many oranges as compared to country A. Hence, country A shall specialize in orange and country B shall specialize in mangoes (Feenstra 2015). Figure 2: Absolute Advantage (Source: Created by Author) The above graph shows the absolute advantage that is demonstrated with the help of the PPC curve. The above graph shows that country A can produce 30 units of oranges whereas, country B can produce only 6. On the other hand, country B can produce 18 units of mangoes and country A can produce only 4. Hence, it is apparent that country A should produce oranges and country B should produce mangoes and sell them to each other. Comparative advantage, on the other hand deals with the reduction of the opportunity cost of a given production policy. Country Mango/units produces per unit of time Opportunity Cost of Mangoes Orange/ units produces per unit of time Opportunity Cost of Oranges Country A 12 6/12 = 0.5 6 12/6 = 2 Country B 24 18/24 = 0.75 18 24/18 = 1.33 In the above table, it can be seen that country A has to give up 0.5 oranges in order to produce a mango. However, country B has to give up 0.75 oranges to produce a mango. On the other hand, country A has to give up two mangoes to produce an orange. On the other hand, country B has to give up only 1.33. Hence, it can be concluded that country A has a comparative advantage over mangoes and country B has a comparative advantage over oranges (Levchenko and Zhang 2016). Figure 3: The Comparative Advantage (Source: Created by Author) The above figure shows that the slope of country A is steeper as compared to that of country B. This specifies that country a needs to give up more mangoes in order to produce more oranges. As a result, country B has a lower opportunity cost having comparative advantage over oranges. In that case, country A has a lower opportunity cost and a comparative advantage over mangoes. As a result, country A shall specialize in mangoes and country B shall specialize in oranges and sell them to each other. References Daley, J.I., Stahre, M.A., Chaloupka, F.J. and Naimi, T.S., 2012. The impact of a 25-cent-per-drink alcohol tax increase.American journal of preventive medicine,42(4), pp.382-389. Feenstra, R.C., 2015.Advanced international trade: theory and evidence. Princeton university press. Fogarty, J.J., 2013. Alcohol Demand, Externalities and Welfare-Maximising Alcohol Taxes. InWine Economics(pp. 28-48). Palgrave Macmillan UK. Levchenko, A.A. and Zhang, J., 2016. The evolution of comparative advantage: Measurement and welfare implications.Journal of Monetary Economics,78, pp.96-111. Schumacher, R., 2012. Adam Smiths theory of absolute advantage and the use of doxography in the history of economics.Erasmus Journal for Philosophy and Economics,5(2), pp.54-80.