THE GAINS AND LOSSES OF AN EXPORTING COUNTRY
Figure 2 shows the Isolandian steel market when the domestic equilibrium price before trade is below the world price. Once free trade is allowed, the domestic price rises to equal the world price No seller of steel would accept less than the world price, and no buyer would pay more than the world price Once the domestic price has risen to equal the world price, the domestic quantity supplied differs from the domestic quantity demanded. The supply curve shows the quantity of steel supplied by Isolandian sellers. the demand curve shows the quantity of steel demanded by Isolandian buyers. Because the domestic quantity supplied is greater than the domestic quantity demanded, Isoland sells steel to other countries. Thus, Isoland becomes a steel exporter Although domestic quantity supplied and domestic quantity demanded differ, the steel market is still in equilibrium because there is now another participant in the market: the rest of the world. One can view the horizontal line at the world price as representing the demand for steel from the rest of the world. This demand curve is perfectly elastic because Isoland, as a small economy, can sell as much steel as it wants at the world price Now consider the gains and losses from opening up trade. Clearly, not everyone benefits Trade force the domestic price to rise to the world price. Domestic producers of steel are better off because they can
now set I at a higher price, but domestic consumers of steel are worse off because they have to buy price.
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