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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 China's clothing industry expands, the increase in world supply lowers the world price of clothing.

a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that imports clothing, such as the United States.

b. Now draw an appropriate diagram to show how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that exports clothing, such as the Dominican Republic.

c. Compare your answers to parts (a) and (b). What are the similarities and what are the differences? Which country should be concerned about the expansion of the Chinese textile industry? Which country should be applauding it? Explain.

Subpart (a):

To determine
The impact of developing the production in one important country.

Explanation

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 a lower opportunity cost than the foreign countries. The ability to produce the good at a lower opportunity cost is known as the comparative advantage; thus, when international trade is opening in the country, the country will become the exporter of the commodity.

When there is large advancement in the production process in the country, it leads to the increased world supply of clothes; the impact will be on the world price. The world price will fall and the impact on the countries that are importers can be shown on the graph as follows:

In the importing country, the lower world price will lead to the new world price (PW2) being lower than the initial world price (PW1), which leads to the increase of imports of the country...

Subpart (b):

To determine
The impact of developing the production in one important country.

Sub part(c):

To determine
The impact of developing the production in one important country.

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