QUESTION: 1. (a) explain how “Fair-Trade” Coffee is a form of insurance. Who is
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Question
QUESTION: 1. (a) explain how “Fair-Trade” Coffee is a form of insurance. Who is being insured? Against what? (b) what is the effective “price” of this insurance to those that participate in the program? (c) the Organization of Petroleum Exporting Countries (OPEC) is another international organization devoted to supporting the price of a commodity on international markets. How is OPEC similar to the “Fair-Trade” movement? How are they different? APPLICATION Prices in Agriculture At the end of the previous chapter, we discussed the Prebisch-Singer hypothesis, which states that the prices of primary commodities tend to fall over time. Although we argued that this hypothesis does not hold for all primary commodities, it does hold for some agricultural goods: the relative prices of cotton, palm oil, rice, sugar,Explanation / Answer
1(a). Fair trade Coffee is the form of insurance as fair-trades is an idea to avoid the middle man from the market. As a result, the prices which are given to the coffee producer would have the minimum fixed price. This would help in case of loss to the coffee producer from fluctuation in the price of the coffee. Hence, the fair trade ensures or provide the issuance against the loss arises from risks.
Coffee farmers are insured against the fluctuations of coffee prices. This provides the more stable source of income.
(b) The effective “price” of this insurance to those that participate in the program is that they would get a stable source of income. This also covers the risk associated with the boom and bust cycle of price fluctuation. Here the fluctuation of prices frequency is low.
(c) OPEC is an organization of group of countries which supporting the price of a commodity on international markets. The commodity here is Petroleum. The price of the petroleum in the international market is also fluctuating as it is highly demanded commodity.
OPEC is similar to the “Fair-Trade” movement in the way that it would stabilize the volatility in the price of the commodity. The minimum price is fixation of the commodity by OPEC.
The difference is that the commodity is highly in demand and limited to some specific countries hence the prices are highly volatile than the coffee price. This commodity is the essential to the almost every country. Hence, different country pays in different as per their need and demand. The price is much higher hence the risk associated is also greater due to fluctuation in price. The only difference is the necessity and demand of the commodity by the country.