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Principles of Economics- Mankiw (5th) 178

Principles of Economics- Mankiw (5th) 178 - 184 PA R T T H...

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184 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE ± Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers. THE GAINS AND LOSSES OF AN IMPORTING COUNTRY Now suppose that the domestic price before trade is above the world price. Once again, after free trade is allowed, the domestic price must equal the world price. As Figure 9-4 shows, the domestic quantity supplied is less than the domestic quan- tity demanded. The difference between the domestic quantity demanded and the domestic quantity supplied is bought from other countries, and Isoland becomes a steel importer. In this case, the horizontal line at the world price represents the supply of the rest of the world. This supply curve is perfectly elastic because Isoland is a small economy and, therefore, can buy as much steel as it wants at the world price. C B D A Price of Steel Price before trade Price after trade 0 Quantity of Steel Domestic supply
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