Question

Winners and losers from free trade

Consider the imaginary economy of Meekerton and the market for meekles, a hypothetical good. Without international trade the domestic price of meekies is $21.
Suppose that the worid price of meekles is $33. Assume that if it were to enter the international market for meekies, Meekerton is too small to influence the world price.

If Meekerton decides to participate in free trade, then it will ___meekies.

When a nation is too small to affect world prices, allowing free trade will have a non-negative effect on total surplus in that country, regardless of whether it imports or exports as a result of international trade.
A.True
B. False

Answer 1

Meekerton will export meekles if it engages in free trade due to the higher world price. Free trade typically increases total surplus in a country, though it creates both winners and losers. Protections and strategic trade deals can help manage the negative impacts and ensure mutual benefits.

Step-by-step explanation:

If the domestic price of meekles in Meekerton is $21 and the world price is $33, and Meekerton is a small economy that cannot influence the world price, Meekerton will become an exporter of meekles once it enters into international trade. This is because producers in Meekerton can sell their meekles at a higher price on the world market. As a result, domestic producers will benefit from increased profits and potential expansion. On the other hand, domestic consumers will face higher prices due to the competition with international buyers. This outlines the basic winners (producers) and losers (consumers) in the short term of the introduction to free trade.

The statement claiming that allowing free trade will have a non-negative effect on total surplus in the country, regardless of whether it imports or exports as a result of international trade, is true. Total surplus typically increases as the gains from trade (like increased producer surplus from higher world prices) are generally larger than the losses (such as consumer surplus due to higher prices). However, while total surplus may increase, it is essential to acknowledge that there are specific winners and losers in the process.

Though international trade typically benefits a country as a whole, it can create challenges, including job losses in some sectors due to foreign imports. Protectionist measures like tariffs and quotas can protect certain industries temporarily, but they also come with costs, such as higher prices for consumers and potential trade retaliation from other countries. Additionally, trade deals can help address some concerns and ensure mutual benefits while incorporating human rights and environmental standards. Moreover, there can be strategies in place to mitigate the adverse effects of trade on specific groups, such as retraining or relocating displaced workers.