2. Winners and losers from free trade Consider the market for meekers in the ima

Question

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 $30. Suppose that the world price of meekers is $40. 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. Given current economic conditions in Meekertown, complete the following table by indicating whether each of the statements is true or false. Statement Meekertownian consumers are worse off under free trade than they were before Meekertownian producers were better off without free trade than they are with it. True False True or False: When a country is too small to affect the world price, allowing 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

Explanation / Answer

Answer:

If world price is higher than aurarky price, country will engage in export. Domestic price increases to world price after engage in trade. It decreases consumer surplus and increases producer surplus. Total surplus will be increased as increase in producer surplus offset the decrease in consumer surplus.

Here if meekertown allows free trade, then it will benefit meekers.

Meekertownian consumers are worse off under free trade than they were before - TRUE

Meekertownian producers are better off without free trade than they are with it- FALSE

when a country can not influence world price, engage in trade and produce in which it has comparative advantage, export it and import in which it has no comparative advantage. So countries become better off after trade regardless whether it is importing or exporting. So the given statement is TRUE.

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