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In the international trade example, we implicitly assumed that the world price ration was unaffected when...

In the international trade example, we implicitly assumed that the world price ration was unaffected when the domestic country engaged in trade. Under what conditions is this assumption reasonable? If the world price ration is affected, how will it change?

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Answer #1

This assumption is reasonable only when we are considering a small nation opening to trade. It can be small in terms of size or the economic activity done in the country. A small country will have a very small effect on the world trade and it will not affect the world price. (in fact, the only way to differentiate between the small and large country in the world trade is how he is affecting the world price and market. A large country will affect the world price and the small country will not have any effect on the world price.)

IF the world price ration is to change it will be lowered for the good the nation is exporting and the price for the good the nation is importing will be higher.

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