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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

If a nation that does not allow international trade in steel has a domestic price of steel lower than the world price, then

a. the nation has a comparative advantage in producing steel and would become a steel exporter if it opened up trade.

b. the nation has a comparative advantage in producing steel and would become a steel importer if it opened up trade.

c. the nation does not have a comparative advantage in producing steel and would become a steel exporter if it opened up trade.

d. the nation does not have a comparative advantage in producing steel and would become a steel importer if it opened up trade.

To determine
The advantage to the nation.

Answer

Option 'a' is correct.

Explanation

The international trade is the exchange of goods and services between different nations in the world. The exchange will take place and the main two processes are the export and imports. The exports is the sale of domestic goods to the foreigners and imports is the vice versa.

Option (a):

When the domestic price of the commodity is lower than the price in the foreign countries, it denotes that the domestic country is able to produce the good at lower opportunity cost than the foreign countries. The ability to produce the good at lower opportunity cost is known as the comparative advantages and thus when there is an international trade opening in the country, the demand for the domestic steel will increase and the country will become the exporter of steel and so, option 'a' is correct.

Option (b):

When the domestic price of the commodity is lower than the price in the foreign countries, it denotes that the domestic country is able to produce the good at lower opportunity cost than the foreign countries. This ability of the country is known as the comparative advantages and when the trade opens up between the countries, due to the lower opportunity cost, the supply of steel will increase and the country will become a steel exporter and not an importer which makes option 'b' incorrect.

Option (c):

When the domestic price of the commodity is lower than the price in the foreign countries, it denotes that the domestic country is able to produce the good at lower opportunity cost than the foreign countries. This ability of the country is known as the comparative advantages and thus, the option 'c' which explains that the nation does not have any comparative advantage which is incorrect. So, option 'c' is incorrect.

Option (d):

The country has the comparative advantages of production because the country produces steel and the domestic price of steel is lower than the foreign countries. Thus, the country has the comparative advantages in the production of steel and thus when the trade opens: it becomes the exporter and not importer. Thus, option 'd' is incorrect.

Concept

Concept introduction:

International trade: It is the trade relation between the countries.

Export: It is the process of selling the domestic goods in the international market. Thus, the goods produced in the domestic firms will be sold to other foreign countries. So, it is the outflow of domestic goods and services to the foreign economy.

Import: It is the process of purchasing the foreign made goods and services by the domestic country. Thus, it is the inflow of foreign goods and services to the domestic economy.

Comparative advantage: It is the ability of the country to produce the goods and services at lower opportunity costs than the other countries.

Absolute advantage: It is the ability to produce large quantities of commodities with the help of fewer inputs.

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