Carefully explain how, and under what conditions, an increase in foreign markets available to the United States computer producers would lead to an increase in economic well-being for consumers of computers in the United States.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: According to the standard competitive model of trade, consumers in the United States do not gain if U.S. computer producers start exporting their products to the other countries. In fact, according to this model, U.S. consumers will be worse off as they will have to pay the higher international price for a computer. However, the availability of foreign markets to the computer manufacturers in the United States can prove to be beneficial for U.S. consumers under certain conditions. Here are the two most important conditions. The first rests on the assumption that the computer industry is monopolistically competitive. The opening of trade in this industry leads to a greater variety of computers available to U.S. consumers, and prices might also decline with increased competition from the imports.

The second can be derived from the assumption that there are external economies of scale in the computer industry. As the local computer industry expands, the production cost of computers decreases, which eventually leads to a decline in the price of computers that U.S. consumers will pay.