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Principles of Economics- Mankiw (5th) 186

Principles of Economics- Mankiw (5th) 186 - 192 PA R T T H...

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192 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE If the world price is now higher than the Isolandian price, our price would rise. The higher price would reduce the amount of steel Isolandians consume and raise the amount of steel that Isolandians produce. Isoland would, therefore, become a steel exporter. This occurs because, in this case, Isoland would have a comparative advantage in producing steel. Conversely, if the world price is now lower than the Isolandian price, our price would fall. The lower price would raise the amount of steel that Isolandians consume and lower the amount of steel that Isolandians pro- duce. Isoland would, therefore, become a steel importer. This occurs be- cause, in this case, other countries would have a comparative advantage in producing steel. Question: Who would gain from free trade in steel and who would lose, and would the gains exceed the losses? Answer: The answer depends on whether the price rises or falls when trade is allowed. If the price rises, producers of steel gain, and consumers
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