Country A produces shoes at a lower cost than Country B. As a result, most of the shoes purchased in Country B are made in Country A. Explain how trading with Country A results in a net gain for Country B.
What will be an ideal response?
POSSIBLE RESPONSE: As a result of the free trade between Country A and Country B, the price of shoes in Country B will be equal to the international price. So, the prices of shoes in Country B will fall (compared to the situation of no trade). Consumers will gain due to the lower price, and the increased purchases of shoes (consumers' total surplus is measured by the area below the demand curve for shoes and above the international price). Facing a lower price (the international price), the domestic producers of shoes in Country B will react by decreasing their production of shoes. Hence, there is a loss of surplus to producers associated with the opening of trade. In general, consumers gain more than producers lose, so trade results in a net gain for Country B.
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