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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.)

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 9, Problem 5PA
Textbook Problem
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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.)

(a):

To determine

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):

To determine

Change in total surplus.

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