Notes Jan13 - not as much as they had before trade Example...

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EC340 Sec. 3 Professor Matusz 1/13/11 Autarky: self sufficiency Autarkic prices: prices that prevail in each country without trade When QD > QS there is a shortage and a demand for imports. When QD < QS there is a surplus and a demand for exports. In the importing country, consumer surplus increases and producer surplus decreases. In the exporting country, producer surplus increases and consumer surplus decreases. There is a world equilibrium of supply and demand, which sets an international price. This price is determined where the import quantity demanded is equal the export quantity available. Permitting trade allows a lower price in the importing country, and causes a higher price in the exporting country. The country that is receiving imports continues to produce but
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Unformatted text preview: not as much as they had before trade. Example 1 Consider a person who typically buys 5 new t-shirts every September. Think about the U.S. in Autarky. Price is $20/shirt in Autarky for a total payment of $100. With trade, the price of shirts is now $10 so the total payment is only $50. This person is better off by at least $50. But this person may buy more shirts now that the price is lower. How do we value the welfare to that person of the 6 th , 7 th , 8 th , … shirt? Suppose that the 6 th shirt was “worth” $12 to that person. They only pay $10 so the net welfare gain is $2. Height of demand curve represents maximum price the consumer is willing to pay. Height of supply curve represents minimum price the producer is willing to accept....
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