As Big transitions to free trade with rising world demand, the world price increases, impacting the domestic price, which is expected to align with the higher global price.
If the economy of Big transitions from autarky to free trade with an increase in world demand surpassing world supply, the world price will rise. In free trade, as demand outpaces supply globally, the increased competition for goods generally results in higher prices. This rise in the world price will impact the domestic price in Big. As Big integrates into the global market, its domestic price will likely align with the higher world price. The principle of the law of one price suggests that, in an efficient market, identical goods should sell for the same price when expressed in a common currency. Therefore, the domestic price in Big is expected to increase, reflecting the elevated world price and the effects of increased demand relative to supply on the global stage.
Complete question:
Assuming the economy of Big moves from autarky to free trade and world demand increases more than world supply, what will happen to the world price, and how will it impact the domestic price?