The Commonwealth Government is currently in the process of negotiating a Free Trade Agreement with China. Assuming, counter factually, that we are currently prevented from trading with China, explain the costs and benefits of entering into such an agreement.
Free trade agreement is an agreement between two countries where tariffs, imports, and quotas are eliminated. There is also a tendency of free movement of people between those countries or open boarder.
In this question, I have assumed the production of natural gas and clothing in each country (Australia and China). Then I find out the opportunity cost for producing natural gas and cloths in each country so that I can find out which country has the absolute advantage in production natural gas or clothing. Once you get the absolute advantage you are able to know the comparative advantage for each country so that you are able know or make a more informed decision on whether to accept the free trade or leaving the way it is.
This is the level at which an organization or firm cannot produce an extra good without lowering the production of the other product. Efficient production is attained when a product is manufactured at the lowest average total cost. This occurs when the two products are operating along their production possibility frontier. (Taylor & Frost, 2006)
Production possibility frontier
This is the boundary between attainable and unattainable levels of production of goods. It shows what can be attained given existing resources. For example, the production of ice cream and yoghurt, the production possibility frontier (PFF) will show the maximum combination of the two efficiently use of resources. (Bentrick, 2007)
This is the best alternative decision among many choices a person or an organization has (unlimited choices).
This is where a country can produce a product more cheaply than the other country....