Trade and standard of living.

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Chapter 9, Problem 9.4.8PA

To determine

Trade and standard of living.

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Suppose that when a country opens to free trade in a good, the price of that good rises from $10 to $15. As a result, the domestic quantity supplied rises from 1,000 to 1,020 and the domestic quantity demanded falls from 1,000 to 500. What are the gains from trade? Assume linear domestic supply and demand curves.

Comment on the following statement: “An examination of the Ricardian model of comparative advantage yields the clear result that trade is (potentially)beneficial for each of the two trading partners since it allows for an expanded consumption choice for each. However, for the world as a whole, the expansion of production of one product must involve a decrease in the availability of the other, so that it is not clear that trade is better for the world as a whole as compared to an initial situation of non-trade (but efficient production in each country). ”