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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

When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls. Which of the following describes the situation?

a. Domestic production of coffee rises, and Ectenia becomes a coffee importer.

b. Domestic production of coffee rises, and Ectenia becomes a coffee exporter.

c. Domestic production of coffee falls, and Ectenia becomes a coffee importer.

d. Domestic production of coffee falls, and Ectenia becomes a coffee exporter.

To determine
The impact of falling domestic price of coffee due to the international trade.

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 (c):

The domestic price of the commodity falls when the international trade takes place in the economy, and it means that the domestic price was higher than the international price before the trade. This is the result of having higher opportunity cost in producing the coffee domestically which means that the country does not have comparative advantages in producing the coffee. Thus, when the trade takes place, it will import the coffee from the international market and thus, option 'c' is correct.

Option (a):

The decreasing price of coffee after the opening up of trade in the economy shows that the country has no comparative advantages in the production of the coffee domestically and thus, the country will import coffee at lower price and increases the production of other alternative goods...

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