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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

Draw the supply-and-demand diagram for an importing country. Identify consumer surplus and producer surplus before trade is allowed. Identify consumer surplus and producer surplus with free trade. What is the change in total surplus?

To determine
The changes in consumer, producer and total surplus due to importing.

Explanation

When the situation the domestic price is above the foreign price without trade, it means that the country has higher opportunity cost of producing the commodity and there is no comparative advantage in producing the commodity to the domestic country. The country will not produce the commodity when the country does not have the comparative advantage and it will import those commodities from the international market. This situation can be illustrated on the graph as follows:

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