International Trade - Week 6.docx - Economics – Week 6 Chapter 6 International Trade Definitions The domestic price is the equilibrium that would

International Trade - Week 6.docx - Economics – Week 6...

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Economics – Week 6 Chapter 6: International Trade Definitions: - The domestic price is the equilibrium that would occur in a country if no international trade is allowed. - The world price is the equilibrium price on the international market. Economies: - A closed economy is an economy that does not engage in international trade. A closed economy is said to be in autarky . - A small open economy participates in international markets but is small enough that its supply (or demand) does not affect the world price. o The fact that the world price is constant (i.e., it does not change with the quantity produced domestically) comes from the assumption that our country is a “small open economy”. Because our country is assumed to be so small relative to rest of the world, it cannot have an absolute advantage in producing baby formula. International Trade: Exporting - Since the world price is higher than the domestic price, producers will naturally be inclined to sell their product quantity at the world price. - Due to this increase in price for consumers, the quantity supplied outweighs the quantity demanded, where this difference is covered by exports. - As a result, the consumer surplus significantly decreases, and the producer surplus significantly increases (when compared to if it were at the market equilibrium). - This increase in PS, is more than the decrease in CS, and this is due to the “ gains from international trading.” International Trade: Importing -
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