ECON 1000 Lecture 11: Econ 1000C_Oct 8

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yellowbear141

27 Feb 2016

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If the world price of textiles is higher than the domestic price, then country would become an exporter of textiles once trade is permitted. If the world price of textiles is lower than the domestic price, then country would become an importer of textiles. By comparing the world price and the domestic price before trade, we can determine whether country is better or worse at producing textiles than the rest of the world. Key assumption (small open economy- world price is fixed to the economy and therefore it is a price-taker ) no matter how much we export/import world price stays the same. While winners from trade could compensate the losers and still be better off, such compensation rarely occurs. Tariff: a tax on imports (good produced in a foreign country and consumed domestically) Moves a market closer to the equilibrium that would exist without trade, and therefore reduces the gains from trade.

Related Questions

2. Winners and losers from free trade

Consider the market for meekers in the imaginary economy of Meekertown. In the absence of international trade, the domestic price of a meeker is $21. Suppose that the world price for a meeker is $22. Assume that Meekertown is too small to influence the world price for meekers once they enter the international market.

If Meekertown allows free trade, then it will meekers.

Given current economic conditions in Meekertown, complete the following table by indicating whether each of the statements is true or false.

Statement	True	False
Meekertownian consumers are worse off under free trade than they were before.
Meekertownian producers are worse off under free trade than they were before.

True or False: When a country is too small to affect the world price, allowing for free trade will always increase total surplus in that country, regardless of whether it imports or exports as a result of international trade.

True

False

In the country of Wiknam, there is only one firm that produces and sells soccer ball. Initially, international trade is prohibited in the country. The following equations describe the monopolist's demand, marginal revenue, total cost and marginal cost: Demand: P = 10 - Q Marginal Revenue: MR = 10 - 2Q Total Cost: TC = 3 + Q + 0.5Q2 Marginal Cost: MC = 1 + Q Q stands for quantity and P is the price measured in Wiknamian dollars.

a) How many soccer balls does the monopolist produce? At what price are they sold? What is the monopolist's profit? Show all your calculations.

b) One day, the King of Wiknam decrees that henceforth, there will be free trade- either imports or exports- of soccer balls at the world price of $6. The firm now becomes a price taker in a competitive market. What happens to the domestic production of soccer balls? What happens to domestic consumption? Does Wiknam export or import soccer balls?

c) Suppose that the world price was not $6, but instead, happens to be exactly the same as the domestic price without trade as determined in part a) above. Would allowing trade change anything for the Wiknamian economy? Explain

purplewolf822

1. If we know that Canada exports maple syrup, we can conclude that maple syrup consumers in Canada are worse off than they would be in the absence of trade.

Is the statement true or false?

2. When a country opens up to trade in a good for which it has a comparative advantage, and the country begins to export the good, we can conclude that:

	a.	The domestic price will fall after trade opens up.
	b.	The total surplus for this good will increase as a result of opening up the market to international trade.
	c.	Opening the market to international trade will create a deadweight loss.
	d.	Both buyers and sellers in that country will be better off as a consequence of opening up the market to international trade.

cyanturtle416

ECON 1000 Lecture 11: Econ 1000C_Oct 8

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