CHAPTER 9 - CHAPTER 9 . :Textilesare ,andthereismuchworld tradeintextiles.Moreover,thetextilemarketis

CHAPTER 9 - CHAPTER 9 . :Textilesare ,andthereismuchworld...

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CHAPTER 9 9-1The Determinants Of Trade Consider the market for textiles. The textile market is well suited to  examining the gains and losses from international trade: Textiles are  made in many countries around the world, and there is much world  trade in textiles. Moreover, the textile market is one in which  policymakers often consider (and sometimes implement) trade  restrictions to protect domestic producers from foreign competitors.  We examine here the textile market in the imaginary country of  Isoland. 9-1a The Equilibrium Without Trade As our story begins, the Isolandian textile market is isolated from the  rest of the world. By government decree, no one in Isoland is allowed  to import or export textiles, and the penalty for violating the decree is  so large that no one dares try. Because there is no international trade, the market for textiles in  Isoland consists solely of Isolandian buyers and sellers. As  Figure 1  shows, the domestic price adjusts to balance the quantity supplied by  domestic sellers and the quantity demanded by domestic buyers. The  figure shows the consumer and producer surplus in the equilibrium  without trade. The sum of consumer and producer surplus measures  the total benefits that buyers and sellers receive from participating in  the textile market.
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Now suppose that, in an election upset, Isoland elects a new  president. The president campaigned on a platform of “change” and  promised the voters bold new ideas. Her first act is to assemble a  team of economists to evaluate Isolandian trade policy. She asks them  to report on three questions: If the government allows Isolandians to import and export  textiles, what will happen to the price of textiles and the quantity  of textiles sold in the domestic textile market? Who will gain from free trade in textiles and who will lose, and  will the gains exceed the losses? Should a tariff (a tax on textile imports) be part of the new trade  policy? After reviewing supply and demand in their favorite textbook (this  one, of course), the Isolandian economics team begins its analysis. 9-1b The World Price And Comparative Advantage The first issue our economists take up is whether Isoland is likely to  become a textile importer or a textile exporter. In other words, if free  trade is allowed, will Isolandians end up buying or selling textiles in  world markets?
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