EC120 Lecture Notes - Lecture 10: Economic Efficiency, Multiple Choice, Protectionism

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2 Nov 2015

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Ec120 lecture #10 application: international trade. The equilibrium without international trade: example: textile market in isoland, when there is no international trade, the market for textiles consists solely of the buyers and sellers of the country. Intersection of demand and supply gives us equilibrium in price and quantity. Multiple choice question on exam: focus on question, think logically, answer. When a country allows trade and becomes an exporter of a good, domestic producers of the good are better off and domestic consumers of the good are worse off. When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off and domestic producers are worse off. Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers. Active learning plasma tvs: without trade, pd = , q = 400.

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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

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

Under free trade, a large country produces 1 million leather bags per year and imports another 2 million bags per year at the world price of $60 per bag. Assume that the country imposes a specific tariff of $5 per bag. As a result, the per-unit price of leather bags decreases to $58 in the international market, and the import of leather bags drops to 1.6 million. The domestic production, on the other hand, increases to 1.1 million.

Following the imposition of the tariff, the domestic consumers pay a price of ___ for each bag.

lavenderhornet476

EC120 Lecture Notes - Lecture 10: Economic Efficiency, Multiple Choice, Protectionism

EC120 Full Course Notes

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