Question

Which of the following correctly identifies an impact of the opening of trade for an industry with external economies?

• A、

  Consumers of the product in the exporting country lose consumer surplus.

• B、

  Producers of the product in the importing countries lose producer surplus.

• C、

  Consumers of the product in the importing country lose consumer surplus.

• D、

  Producers of the product in the exporting country lose producer surplus.

Answer 1

B. Producers of the product in the importing countries lose producer surplus.

This is so because due to opening up of trade, the domestic demand of the importing country can be met now by importing the goods from the other countries at a (usually) lower price existing in the world market than the price of the product in the domestic market of the importing country. Now, the producers of the importing country will have to sell their products at the lower world price or they will lose their customers to imported goods, and also they will experience a reduction in the demand for their products as some of the demand will shift to foreign producers.

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