Question

With reference to the small open economy version of the perfectly competitive market framework, which of the following are true with respect to a domestic import market when it opens to free trade, transitioning away from autarky?

a.the surplus of domestic producers increases
b.total surplus increases
c.the "rest of the world" (international market)
has the cost advantage
d.the surplus of domestic consumers increases

Answer 1

With free trade, a small open economy experiences an increase in surplus and benefits from competition and variety. All of the above options are correct.

Step-by-step explanation:

In a small open economy transitioning from autarky to free trade, the following statements are true:

1. The surplus of domestic producers increases
2. The surplus of domestic consumers increases
3. Total surplus increases
4. The "rest of the world" (international market) has the cost advantage

Opening the domestic import market to free trade allows for increased competition, variety, and access to economies of scale, leading to overall benefits for both producers and consumers.