Principles of Economics- Mankiw (5th) 175

Principles of Economics- Mankiw (5th) 175 - CHAPTER 9 A P P...

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CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 181 After reviewing supply and demand in their favorite textbook (this one, of course), the Isolandian economics team begins its analysis. THE WORLD PRICE AND COMPARATIVE ADVANTAGE The first issue our economists take up is whether Isoland is likely to become a steel importer or a steel exporter. In other words, if free trade were allowed, would Isolandians end up buying or selling steel in world markets? To answer this question, the economists compare the current Isolandian price of steel to the price of steel in other countries. We call the price prevailing in world markets the world price. If the world price of steel is higher than the domestic price, then Isoland would become an exporter of steel once trade is permitted. Isolandian steel producers would be eager to receive the higher prices available abroad and would start selling their steel to buyers in other countries. Conversely, if the world price of steel is lower than the domestic price, then Isoland would be-
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