Question 1

If the world price is higher than the no-trade domestic price, then domestic producers gain and domestic consumers lose as a result of free trade.

Accepted Answer

When the world price is higher than the no-trade domestic price, domestic producers are able to sell their goods at a higher price in the global market, resulting in increased profits. However, domestic consumers will have to pay a higher price for foreign goods and may switch to domestic alternatives if available. As a result, they may have to pay a higher price for domestic goods as well, leading to a net loss for them.

Question 2

In a two-country world, the opening of free trade does not make everyone in the two countries better off. What assumption(s) must be made in order to make the claim that both countries do in fact benefit from the free trade?

Accepted Answer

The answer of In a two-country world, the opening of...

Question 3

The net national gain from trade can be measured by the change in consumer and producer surplus that results from trade.

Accepted Answer

The net national gain from trade is the sum of consumer and producer surplus created by trade. Therefore, the change in consumer and producer surplus resulting from trade can be used to measure the net national gain from trade.

Question 4

Why would winter clothing be produced in countries whose residents have very little demand for such clothing?

Accepted Answer

The answer of Why would winter clothing be produced in...

Question 5

While international trade will benefit both the importing and exporting country in a two-country world, the gains from trade in the exporting country must be greater than the gains from trade in the importing country.

Accepted Answer

The theory of comparative advantage suggests that both countries can benefit from trade, but it does not specify that the gains from trade must be greater for the exporting country than for the importing country. The distribution of gains depends on various factors, including the terms of trade, and both countries can potentially benefit equally or one may benefit more than the other, but there's no rule that the exporting country benefits more.

Question 6

Assume that there are only two countries in the world, Pacifica and Atlantica. Both countries produce and consume surfboards. The pre-trade price of surfboards in Atlantica is lower than the pre-trade price of surfboards in Pacifica. Draw a three-graph diagram to depict the Pacifica, Atlantica, and international markets for surfboards illustrating the pre-trade price difference. Now assume that free trade opens up between Pacifica and Atlantica. Depict a plausible world price in the graphs. What happens to overall economic welfare in the two countries? Be sure to label and refer to the graphs in your answer.

Accepted Answer

The answer of Assume that there are only two countries...

Question 7

Country A produces shoes at a lower cost than the country B. As a result, most of the shoes purchased in the country B are made in country A. Explain how trading with country A results in a net gain for country B?

Accepted Answer

The answer of Country A produces shoes at a lower...

Question 8

Consumer surplus is the net economic benefit to consumers who are able to buy a good at a price lower than the highest price that they are willing to pay.

Accepted Answer

Consumer surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price they pay. It represents the additional benefit or value that consumers receive beyond what they had to pay for a product or service. Hence the statement is true.

Question 9

An increase in individual income will lead to an inward shift of the demand curve for a commodity.

Accepted Answer

An increase in individual income typically leads to an outward shift of the demand curve for a commodity, as people have more money to spend and are likely to buy more of the product, assuming it is a normal good.

Question 10

The gains from trade are divided in proportion to the price changes that trade brings to the trading countries.

Accepted Answer

The answer of The gains from trade are divided in...

Question 11

Free trade is a zero-sum activity because a county always gains at the expense of its trading partner.

Accepted Answer

Free trade is actually a positive-sum activity as both trading partners can benefit from the exchange of goods and services. Both countries can specialize in the production of certain goods and trade with each other, resulting in increased economic efficiency and overall gains.

Question 12

Consider a product with a perfectly competitive market. Carefully explain why nations gain from engaging in international trade in this product. Do nations gain equally from trade? If not, what determines which country gains more? (In your answer you can assume a two-country world.)

Accepted Answer

The answer of Consider a product with a perfectly competitive...

Question 13

The difference in the prices of a good in two countries creates opportunities for arbitrage: traders buy the good at a low price in one country and sell it at a higher price in the other. When the difference in the prices vanishes, and the world price is established in both countries, there is no scope for trade anymore because no trader will be willing to buy the good in one country and sell it in another. Discuss the validity of this statement.

Accepted Answer

The answer of The difference in the prices of a...

Question 14

A decrease in income will lead to an increase in the demand for an inferior good.

Accepted Answer

An inferior good is a good for which demand decreases as income increases. Therefore, a decrease in income would lead to an increase in the demand for an inferior good.

Question 15

What is the measure of responsiveness of quantity demanded of a product to a change in its price? Why is it a negative number for a typical good? With the help of suitable diagrams, explain the difference between elastic and inelastic demand.

Accepted Answer

The answer of What is the measure of responsiveness of...

Question 16

If a 1% increase in an individual's income leads to a 0.5% increase in the demand for a good, the good is considered to be a normal good.

Accepted Answer

This is because the 1% increase in income has led to an increase in demand for the good, which is the typical behavior of a normal good.

Question 17

The net economic gains from free trade are usually negative.

Accepted Answer

The net economic gains from free trade are usually positive because it allows for specialization, lower costs, and increased competition which can lead to economic growth and higher standards of living. However, there may be some short-term negative effects on certain industries and workers who may face increased competition or job displacement.

Question 18

If markets are perfectly competitive, the free-trade price of a good in an importing country is expected to be lower than the pre-trade price of the good in that country.

Accepted Answer

In a perfectly competitive market, free trade allows for greater competition and access to cheaper goods from other countries. This increased competition is expected to lower prices for consumers in the importing country.

Question 19

The price elasticity of demand measures the responsiveness of consumers to changes in the price of a product.

Accepted Answer

The price elasticity of demand is a measure of how sensitive consumers are to changes in the price of a product. It measures the percentage change in the quantity demanded of a product in response to a percentage change in its price. If the demand for a product is highly elastic, small changes in price can cause large changes in demand, while if it is inelastic, changes in price have little effect on demand. So, the statement is true.

Question 20

When free trade begins, producers in the importing nation gain while producers in the exporting nation are worse off.

Accepted Answer

When free trade begins, both producers in the importing and exporting nations have the opportunity to benefit from increased efficiency and lower costs. However, there may be some adjustment costs for producers in the exporting nation as they face increased competition. In the long run, however, free trade can lead to greater overall gains for both nations.

Quiz 2: The Basic Theory Using Demand and Supply