Principles of Macroeconomics (Mind...

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

Principles of Macroeconomics (Mind...

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


Chapter 9.2, Problem 2QQ
Textbook Problem

Draw a supply-and-demand diagram for wool suits in the country of Autarka. When trade is allowed, the price of a suit falls from 3 to 2 ounces of gold. In your diagram, show the change in consumer surplus, the change in producer surplus, and the change in total surplus. How would a tariff on suit imports alter these effects?

Expert Solution
To determine
The impact of international trade on total surplus.

Explanation of Solution

The international trade is the exchange of goods and services between different nations in the world. The exchange will take place and the main two processes are the export and imports. The exports is the sale of domestic goods to the foreigners and e imports is the vice versa. The consumer surplus can be explained as the difference between the highest price that the consumer is willing to pay and the actual price that the consumer pays. The difference between these two prices is known as the surplus to the consumer. The producer surplus is the difference between the minimum willing to accept price by the seller and actual price that the seller receives for the commodity.

When the price of wool is 3 ounce of gold in the domestic country and only 2 ounce in the neighboring country, the wool is cheaper in the foreign country than the domestic country. In such a situation, the allowing of the international trade will lead to the import of wool by the domestic country. This situation can be illustrated as follows:

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