Without trade the price of one unit of product Y is 1/3 that of one unit of X in a small country.
Products X and Y trade on the world market at equal prices.If the small country starts trading with the rest of the world:
A)the small country would import product Y.
B)the small country would export both product X and product Y.
C)the domestic price of product X would equal the world price.
D)the relative price of X and Y would not change in the small country.

Question

Quizplus · Accepted Answer

When the small country starts trading with the rest of the world, the domestic price of product X will eventually equal the world price. This is because the law of one price states that in a competitive market, identical goods should have the same price in different locations. As product X and Y trade on the world market at equal prices, the domestic price of product X in the small country will eventually converge to the world price. Therefore, the correct choice is C). The other choices are not true as importing only product Y and exporting both X and Y may not necessarily happen, and the relative price of X and Y might change due to market forces.

Without Trade the Price of One Unit of Product Y