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 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

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

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.

Explanation / Answer

1) Meekertownian consumers are worse off under free trade than they were before.
-True

As the world price is higher than in Meekertown, opening up to international trade will align goods prices to that of in the world market. Since world price is higher, meeker price will go up and consumers will have to pay more.

2) Meekertownian producers are worse off under free trade than they were before.
-False

World meeker price is higher than in Meekertown domestic market. So opening up of the market to international trade will provide an opportunity to producers to export to the world market.

3) 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

Free trade creates a surplus in the market because of efficient production and market forces.
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

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