THE EQUILIBRIUM WITHOUT TRADE
As our story begins, the Isolandian steel market is isolated from the rest of the world. By government decree, no one in Isoland is allowed to import or export steel, and the penalty for violating the decree is so large that no one dares try Because there is no international trade, the market for steel 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 Benelux that buyers and sellers receive from the steel market.
: Figure 1 The Equilibrium without International Trade
When an economy cannot trade in world markets, the price adjusts to balance domestic This figure shows consumer and producer surplus in an equilibrium without international market in the imaginary country of Isoland.
Nuw suppose that, ill an election upset, Isoland elects a new president. The president campaigned on 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 back on three questions:
• If the government allows Isolandians to import and export steel, what will happen to the price of steel and the quantity of steel sold in the domestic steel market?
• Who will gain from free trade in steel and who will lose, and will the gains exceed the losses?
• Should a tariff (a tax on steel 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.
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