Question

Consider what happens in Bristol as it transitions from no trade in wheat to trade in wheat. (a) What happens to the price of wheat in Bristol? (b) What happens to the domestic quantity of wheat purchased? (c) What happens to the domestic quantity of wheat produced? (d) Does Bristol export or import wheat? (e) What group (producers or consumers) gains from the transition? (f) What group (producers or consumers) loses from the transition? (g) What group (producers or consumers) has the bigger change of surplus because of the transition? (h) Does Bristol as a whole gain or lose from the transition?

Answer 1

a) The price of wheat will change because now wheat will be available at world price and not domestic price . Trading of wheat will be done as per prevalent price in the world market for wheat .

b) If there is import of wheat into Bristol at a lower world price then quantity purchased will increase . But if there is export of wheat there will be lower quantity available for domestic consumption if supply does not increase .

c) Production or supply of wheat rise or falls as per world price of wheat and autarky price . If there is high demand for wheat producers will supply more .

d) Becoming an exporter or importer depends upon autarky price and world price and comparative advantage . If domestic price is lower than world price Bristol will export wheat .