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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

The world price of wine is below the price that would prevail in Canada in the absence of trade.

a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a graph for the Canadian market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in an appropriate table.

b. Now suppose that an unusual shift of the Gulf Stream leads to an unseasonably cold summer in Europe, destroying much of the grape harvest there. What effect does this shock have on the world price of wine? Using your graph and table from part (a), show the effect on consumer surplus, producer surplus, and total surplus in Canada. Who are the winners and losers? Is Canada as a whole better or worse off?

Subpart (a):

To determine
The impact of international trade.

Explanation

When the domestic price of the commodity is higher (P) than the price in the foreign countries (P1), it denotes that the domestic country is not 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 advantage and thus when there is an international trade opening in the country, the country will become importer. The situation can be illustrated as follows:

Sub part (b):

To determine
The impact of international trade.

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