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The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith’s The Wealth of Nations while on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of $16. The number of T-shirts consumed in Textilia rises to 4 million, while the number of T-shirts produced declines to 1 million. a. Illustrate the situation just described in a graph. Your graph should show all the numbers. b. Calculate the change in consumer surplus, producer surplus, and total surplus that results from opening up trade. ( Hint: Recall that the area of a triangle is ½ × base × height.)
Principles of Macroeconomics (Mind...
Principles of Macroeconomics (Mind...
The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith’s The Wealth of Nations while on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of $16. The number of T-shirts consumed in Textilia rises to 4 million, while the number of T-shirts produced declines to 1 million.
a. Illustrate the situation just described in a graph. Your graph should show all the numbers.
b. Calculate the change in consumer surplus, producer surplus, and total surplus that results from opening up trade. (Hint: Recall that the area of a triangle is ½ × base × height.)
(a):
The impact of free trade on the country.
Explanation of Solution
Here, in the case of the country, the domestic price was $20 and the quantity demanded and supplied was 3 million. Thus, the economy was in its initial equilibrium without trade. When free trade was allowed, the price fell to the world price of $16 and the quantity demanded increased to 4 million, whereas the quantity supplied decreased to just 1 million...
Sub part (b):
Change in total surplus.
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