Question

Assume two countries, Thailand (T) and Japan (J), have one good: cameras. The demand (d) and supply (s) for cameras in Thailand and Japan is described by the following functions: QdT = 60 – P QsT = –5 + 1 4 P QdJ = 80 – P QsJ = –10 + 1 2 P P is the price measured in a common currency used in both countries, such as the Thai Baht. a. Compute the equilibrium price (P) and quantities (Q) in each country without trade. b. Now assume that free trade occurs. The free- trade price goes to 56.36 Baht. Who exports and imports cameras and in what quantities?

Short answer

In summary, without trade, the equilibrium price and quantity in Thailand are 52 Thai Baht and 8 cameras, while in Japan, they are 60 Thai Baht and 20 cameras. When free trade occurs at the price of 56.36 Thai Baht, Thailand exports 5.45 cameras, and Japan imports 5.46 cameras.

Step-by-step solution

Demand and Supply Equations for Thailand and Japan

We are given the following demand and supply equations for Thailand (T) and Japan (J) For Thailand: Demand equation: \(Q_d^T = 60 - P\) Supply equation: \(Q_s^T = -5 + \frac{1}{4}P\) For Japan: Demand equation: \(Q_d^J = 80 - P\) Supply equation: \(Q_s^J = -10 + \frac{1}{2}P\) #Step 2: Determine the Equilibrium Price and Quantity for Thailand#

Solve for equilibrium price and quantity in Thailand

In equilibrium, the quantity demanded equals the quantity supplied, so we can set the demand and supply equations equal to each other to find the equilibrium price (P): \(60 - P = -5 + \frac{1}{4}P\) Now, solve for P: \(65 = \frac{5}{4} P\) \(P = 52\) Now, plug the equilibrium price back into the demand or supply equation to find the equilibrium quantity (Q): \(Q_d^T = Q_s^T = 60 - 52\) \(Q = 8\) So, the equilibrium price for Thailand is 52 Thai Baht, and the equilibrium quantity is 8 cameras without trade. #Step 3: Determine the Equilibrium Price and Quantity for Japan#

Solve for equilibrium price and quantity in Japan

Follow the same process for Japan: Set the demand and supply equations equal to each other: \(80 - P = -10 + \frac{1}{2}P\) Solve for P: \(90 = \frac{3}{2}P\) \(P = 60\) Now, find the equilibrium quantity (Q) by plugging the equilibrium price back into the demand or supply equation: \(Q_d^J = Q_s^J = 80 - 60\) \(Q = 20\) So, the equilibrium price for Japan is 60 Thai Baht, and the equilibrium quantity is 20 cameras without trade. #Step 4: Analyze Trade Situation#

Determine exporters and importers at the free-trade price

We are given the free-trade price as 56.36 Baht. We need to find the quantity demanded and supplied at this price in both countries, and then we can determine which country exports and imports cameras and in which quantity. For Thailand: \(Q_d^T = 60 - 56.36 = 3.64\) \(Q_s^T = -5 + \frac{1}{4}(56.36) = 9.09\) For Japan: \(Q_d^J = 80 - 56.36 = 23.64\) \(Q_s^J = -10 + \frac{1}{2}(56.36) = 18.18\) At the free-trade price of 56.36 Baht, the quantity demanded in Thailand is 3.64 cameras, while the quantity supplied is 9.09 cameras. In contrast, Japan has a quantity demanded of 23.64 cameras and a quantity supplied of 18.18 cameras. Since the quantity supplied in Thailand is greater than the quantity demanded, Thailand will be the exporter of cameras. The export quantity will be the difference between the quantity supplied and demanded in Thailand: Export Quantity: \(9.09 - 3.64 = 5.45\) Japan will be the importer of cameras since its quantity demanded is greater than the quantity supplied. Import Quantity will be the difference between the quantity demanded and supplied in Japan: Import Quantity: \(23.64 - 18.18 = 5.46\) In conclusion, when free trade occurs at the price of 56.36 Thai Baht, Thailand exports 5.45 cameras, and Japan imports 5.46 cameras (assuming rounding discrepancy).

Key concepts

Equilibrium Price

The equilibrium price is a fundamental concept in economics, representing the point where the demand for a good matches its supply. Imagine it as the sweet spot in a marketplace where buyers and sellers agree on both price and quantity. To find this price in any market, we match the quantity demanded with the quantity supplied. When these quantities are equal, you have found the equilibrium point.

For example, in the case of Thailand from our exercise, the demand and supply equations help calculate this equilibrium. When the equations are solved, we find that 52 Thai Baht is the equilibrium price, meaning both sellers and buyers are satisfied at this price, with a quantity of 8 cameras exchanged.

Similarly, for Japan, the equilibrium price is calculated at 60 Thai Baht, with a corresponding equilibrium quantity of 20 cameras traded at this price. By understanding and calculating the equilibrium price, economists can predict market behaviors and devise strategies for efficient resource allocation.

Demand and Supply

The principles of demand and supply form the backbone of economic analysis. They describe how market forces determine the optimal price and quantity of goods sold in a marketplace.

• Demand refers to the quantity of a good that buyers are willing and able to purchase at various price levels. Generally, as prices fall, demand increases.
• Supply refers to the amount of a good that sellers are willing and able to provide at different price points. Typically, higher prices encourage more supply, as sellers can earn more.

In our exercise, each country has distinct demand and supply equations for cameras. For Thailand, the demand decreases as price rises, which is typical. Conversely, supply is directly proportional to price, increasing as price rises. Japan follows a similar pattern with its own unique equations for demand and supply.

These concepts are crucial for setting the scene in our examination of trade. By analyzing demand and supply, we understand how much of a good will be supplied and in demand without trade interference.

Export and Import Quantities

In the realm of international trade, understanding export and import quantities is vital. These quantities tell us how much of a product one country will send abroad, and how much another country will purchase from foreign markets.

When free trade introduces a common market price, countries adjust their exports and imports to match this new economic landscape. In our example, at a free trade price of 56.36 Thai Baht, Thailand produces more cameras than its demand, leading to an export surplus of 5.45 cameras.

Japan, on the other hand, demands more than its domestic supply can provide, resulting in a need to import an additional 5.46 cameras. These quantities demonstrate how global trade reallocates goods, often moving them from regions of surplus to areas with shortages, enhancing efficiency on an international scale.

Free Trade

Free trade is the exchange of goods and services between countries without governmental restrictions such as tariffs, quotas, or subsidies. It allows nations to capitalize on their comparative advantages, maximizing global efficiency and wealth.

• Benefits of Free Trade: - Enhanced variety and accessibility of goods for consumers. - Stimulated economic growth through competitive markets. - Increased efficiency and production due to specialization.
• Implications: - Domestic industries might experience intensified competition. - Potential job shifts where businesses seek cost-effective labor or production. - Strategic and economic considerations must be balanced between countries.

In the exercise, adopting a free trade price of 56.36 Baht creates a scenario where Thailand becomes an exporter while Japan imports goods, reflecting their production and consumption differences. Free trade leads to changes in the domestic markets, guiding businesses and governments in strategic decision-making to harness economic potential.