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Assess the following statement about a nation which is an importer: “The greater the elasticity of...

Assess the following statement about a nation which is an importer: “The greater the elasticity of demand, the greater the gains from trade.” Use graphs to demonstrate your response. (Tip: compare 2 graphs, one where demand is inelastic, one where demand is elastic. Keep all other elements the same.

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Answer #1

Greater the elasticity of demand means that with slight changes in price there will be drastic changes in quantity demanded . We know that gains from trade depend primarily on TOT ( terms of trade ) . If a country is importer then it has no comparative advantage in that good and also cannot produce it at cheaper rate . So when trade opens up it will become cheaper . hence if demand is elastic , quantity demanded will increase more than reduction in price , so gains from trade will be greater .

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