Question

1. Consider a US market where there is no international trade.  Draw the US demand and supply curves and indicate the equilibrium price and quantity exchanged.  Now suppose that the world price for this good is above the market equilibrium price in the US.  Describe what happens in this case if international trade is permitted.   Be sure in your answer to explain each of the following:
   1. What happens to the price, level of domestic production, imports or exports, and quantity exchanged in the US.
   2. Who, in the US, wins and loses when international trade is permitted?  Explain.
   3. Explain verbally and in your diagram what the gains from trade are for the US in this case.

Answer 1

Sol :

When the price of grain the US is less than the world price and international trade is permitted , then , U.S will start exporting becuase of lower prices.

(a) When exports increases , supply for rhe domestic country decreases and shift to the left.

This will create excess demand or shortage which will increase the prices of the goods in the domestic country. And quantity exchanges in the U.S decreases

(b) From international trade , Producer of the U.S gains . As, the price of the product increases in the domestic market. And producer surplus will be greater than before

( c) Gain from trade is equal to the shaded area

As, world price is greater than domestic price , so , producer will be im surplus and gain from the international trade.