Foreign TradeIndia produces tea in high quantities and has a comparative advantage in it. Now imagine that the demand for Indian tea rises by a significant level in the global markets and Indian tea producers starts exporting tea in extremely high quantities in order to gain maximum benefits. What will be the impact of this on the Indian tea consumers?Tea in the domestic market will become more expensive.Tea in the domestic market will become cheaper.Tea prices in the domestic market will be unaffected.
Question
Foreign TradeIndia produces tea in high quantities and has a comparative advantage in it. Now imagine that the demand for Indian tea rises by a significant level in the global markets and Indian tea producers starts exporting tea in extremely high quantities in order to gain maximum benefits. What will be the impact of this on the Indian tea consumers?Tea in the domestic market will become more expensive.Tea in the domestic market will become cheaper.Tea prices in the domestic market will be unaffected.
Solution
The impact of this on Indian tea consumers would likely be that tea in the domestic market will become more expensive. Here's why:
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Increase in Demand: As the global demand for Indian tea increases, more tea is exported. This means less tea is available for the domestic market.
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Supply and Demand: The basic principle of economics is that if demand is high and supply is low, prices will rise. In this case, the supply of tea in the domestic market decreases because a significant portion is being exported.
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Higher Prices: As a result, the price of tea in the domestic market increases because the supply is not sufficient to meet the domestic demand.
So, the correct answer is "Tea in the domestic market will become more expensive."
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