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Questions and Answers
Which product should Country A specialize in given its comparative advantage?
What is the primary benefit of international trade for participating countries?
What is a likely outcome of imposing a tariff on imported goods?
How does an import quota differ from a tariff?
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How does consumer surplus change when a country transitions from no trade to free trade for an imported good?
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How are domestic producers affected when a country imports a good under free trade?
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What occurs if the world price of a good is lower than the domestic price before trade?
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Why is free trade considered economically efficient?
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Study Notes
Comparative Advantage
- Country A should specialize in producing computers because it has a lower opportunity cost for producing them compared to Country B, even though it's more efficient at producing cars.
Benefits of Trade
- The primary benefit of international trade is that it allows countries to consume beyond their production possibilities.
Effects of Tariffs on Imports
- A tariff on imported goods likely leads to a reduced quantity of imports, which means fewer imported goods are purchased.
Import Quotas
- Import quotas are different from tariffs because they restrict the quantity of imports rather than raising their price.
Consumer Surplus in Free Trade
- When a country moves from no trade to free trade on a good it imports, consumer surplus increases. This is because consumers benefit from lower prices and greater variety.
Impact of Trade on Domestic Producers
- When a country allows free trade and imports a good, domestic producers of that good experience a reduction in producer surplus because they face competition from cheaper imported goods.
World Price vs. Domestic Price
- If the world price of a good is lower than the domestic price before trade, the country will likely import the good once trade is allowed.
Economic Efficiency in Trade
- Free trade is considered economically efficient because it increases total surplus. This means that the combined benefits to consumers and producers are maximized when there is free trade.
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Description
Explore the concepts of comparative advantage, benefits of trade, and the effects of tariffs and quotas through this quiz. Understand how trade impacts consumer surplus and domestic producers. Test your knowledge on how these economic principles define international trade dynamics.
