Question

(Chapter 8) Suppose that the A

merican cotton market is originally in autarky and then opens up to trade. The world price of

cotton is above the domestic equilibrium price for cotton. Which of the follo wing do we expect to happen?

a.

American consumers are worse off, American producers are

better off, and American workers are worse off

b.

American consumers are better off, American producers are worse off, and American workers are worse off

c.

American consumers are better off, American producers are worse off, and American workers are better off

d.

American consumers are worse off, American producers are better off, and American workers are better off

I understand that the answer is D - but can you provide an explanation?

Answer 1

Here, the Autarky price is lower than the world price that means the US cotton producer are efficient and we have a comparative advantage in the production of Cotton, If the US opens up to trade The economy will be exporting cotton, While exporting the price are higher than the local price and it will decrease the supply to the domestic consumer.

They will be paying a higher price hence worse off. The supplier will be selling more at a higher world price = more profit they are better off. To produce more they will be employing more so workers are better off. Answer is "D".