Question

If the world price for good a is above the domestic price for good a without trade, then consumer surplus will ________ and producer surplus will _______ with trade.

Answer 1

When the world price of good a without trade is higher than the domestic price of good a, consumer surplus increases and producer surplus increases with trade.

Domestic supply will increase until it reaches equilibrium with world market prices. The world price is higher than the domestic price, so until the domestic price rises to the world price, the manufacturer will continue to sell on the global market instead of the domestic market. Therefore, domestic demand will decrease.

If the domestic price is lower than the world price, the country has a comparative advantage and needs to export its products. If the domestic price is higher than the world price, the country has no comparative advantage and must import the product.

Consumer surplus is a measure of consumer well-being and is defined as the excess of social valuation of a product over the price actually paid. It is measured by the area of ​​the triangle above the observed price under the demand curve.

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Answer 2

If the world price for good a is above the domestic price for good a without trade, then consumer surplus will increase and producer surplus will increase with trade.

What is consumer surplus?

Consumer surplus is a measure of the economic benefit that consumers receive from purchasing a good or service at a price that is lower than the maximum price that they are willing to pay.

Consumer surplus is calculated by determining the difference between the price that a consumer actually pays for a good or service and the maximum price that they are willing to pay for that good or service. This difference represents the amount of value that the consumer receives in excess of what they paid for the good or service.

What is domestic price?

Domestic price refers to the price of a good or service within a particular country's domestic market. It is the price at which buyers and sellers within that country are willing to exchange the good or service.

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