Question

Back to Assignment Attempts: 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 meekers is $33. Suppose that the world price of meekers is $25. Assume that Meekertown is too small to influence the world price of meekers once it enters the International market. If Meekertown allows free trade, then it will meekers. dicating whether each of the statements is true or false. Given current economic conditions in Meekertown Statement Meekertownian consumers are worse Meekertownian producers are better off . 80

Answer 1

Ans) When world price is higher than the domestic price, country exports the product. When world price is lower than the domestic price, country imports the product.

Export of goods increase producer surplus and decrease consumer surplus. That is consumers are worse off and producers are better off. But overall nation is benefitted because total surplus of the country increases.

Import of good increases consumer surplus and decreases producer surplus. That is consumers are better off and producers are worse off. But the overall gain to the nation is more, as gain for winners is more than the loss of losers. That is total surplus is increased in spite of loss to producers.

Rice Consumer Surplus Coiteout Trade E Pe Produces Susplus Quantib Qe

Price A $23 World Price $25 Imports Quand

Here we see that since the world price is lower, meekertown will import meekers. Import has increased the consumer surplus and the new consumer surplus is = A + B + D + E. But it has decreased the producer surplus and the new producer surplus is = C. Also total surplus of the country has increased and increase is equal to D + E.

Overall there is gain to meekertown.

Answers÷

1) Fill up÷ If meekertown allows free trade,then it will import meekers, as world price is lower.

2) True/false÷

• First statement is false. As meekertown consumers are better off. As consumer surplus is increased and also the consumers are paying less than the domestic price.
• Second statement is also false. As meekertown producers are worse off. As producer surplus has decreased and the producers are getting lower price than domestic price.

3) This statement is also false. As trade always increases total surplus, whether country imports or exports the product.