Question

Suppose that if Iceland and Japan were both closed economies, the domestic price of fish would be \(\$ 100\) per ton in Iceland and \(\$ 90\) per ton in Japan. If the two countries decided to open up to international trade with each other, which of the following could be the equilibrium international price of fish once they begin trading? LO38.3 a. \(\$ 75\) b. \(\$ 85\) c. S95. d. \(\$ 105\)

Short answer

The equilibrium international price could be \( \$95 \).

Step-by-step solution

Understand Domestic Prices

Iceland has a domestic price for fish at \( \\(100 \) per ton, and Japan has a domestic price of \( \\)90 \) per ton. When both are closed economies, this indicates their respective equilibrium price without trade.

Concept of Equilibrium International Price in Trade

When two countries begin trading, the international price will generally fall between their domestic prices if they have different prices due to comparative advantage. This means the equilibrium international price should be between \( \\(90 \) and \( \\)100 \).

Evaluate Options

Examine the given options: - Option a: \( \\(75 \) is less than Japan's domestic price (\( \\)90 \)), which isn't feasible for an equilibrium price. - Option b: \( \\(85 \) is less than Japan's domestic price, so it's unlikely to be the equilibrium price. - Option c: \( \\)95 \) is between \( \\(90 \) and \( \\)100 \), making it a viable option. - Option d: \( \$105 \) is above Iceland's domestic price, which suggests it's not an equilibrium price.

Conclusion

Since the equilibrium international price should be between the two domestic prices, the only feasible option is \( \\(95 \), as it falls between \( \\)90 \) and \( \$100 \).

Key concepts

Closed Economy

A closed economy is a system where a country does not engage in international trade. This means that all goods and services are produced and consumed domestically. Countries operating under a closed economy system rely solely on internal resources to meet demand, with no imports or exports.
A closed economy is often utilized to protect local industries from external competition, allowing them to grow without the threat of foreign products.
It can also be used as a tool to avoid external economic shocks. However, the downside is the potential for limited variety and higher prices due to the lack of competition.
The domestic price set within a closed economy reflects local supply and demand. For example, in Iceland and Japan, the price of fish was set at different levels when each country operated independently. This shows how local market dynamics influence pricing without international trade influences.

Equilibrium Price

The equilibrium price is the point where the supply of a product matches the demand. This balance ensures that the quantity people want to buy equals the quantity that producers are willing to supply.
In a closed economy, the equilibrium price is determined by internal factors such as production costs and consumer preferences. When a country opens up to international trade, this equilibrium can shift as new market dynamics come into play.

• If a country has a comparative advantage, it can potentially profit from exporting at a higher price than the domestic equilibrium price.
• Conversely, countries may import at lower prices, benefiting from cheaper goods compared to their domestic market price.

The introduction of trade leads to a new international equilibrium price, which often falls between the domestic prices of the trading countries, as seen with Iceland and Japan's fish markets.

Comparative Advantage

Comparative advantage occurs when a country can produce a good at a lower opportunity cost than another country. This concept forms the basis for international trade, explaining why countries engage in the exchange of goods and services.
Even if one country can produce everything more efficiently, two countries can still benefit from trading based on comparative advantage. By specializing in the manufacture of goods where they have the lowest relative cost, they can trade for other goods that would be more costly to produce domestically.
In the context of the exercise, Japan and Iceland would gain from trading fish at an international price between their respective domestic costs, exploiting their comparative advantages, and increasing overall economic welfare.

Fish Market Economics

Fish market economics deals with the supply and demand dynamics of fish as a commodity. In this specific scenario involving Iceland and Japan, the price of fish is determined by various factors, including domestic production capabilities, consumer preferences, and international trade relations.
The exercise illustrates a typical situation in fish market economics where countries with different prices for fish open up to trade. The lower price of fish in Japan suggests a comparative advantage, allowing it to export to Iceland, where the price is higher.
This trade benefits both countries as Japan gains from accessing a new market while Iceland benefits from potentially lower prices. Additionally, fish market economics looks at the sustainability and regulatory aspects, ensuring that fish stocks remain healthy while economically beneficial practices are followed.