Growth and Trade

| January 23, 2015

Question 1. A monopolistically competitive industry exists in both Puleglovia and the rest of the world but there has been no trade in this type of product. Trade in this type of product is now opened.

a. Explain how opening trade affects domestic consumers of this type of product in Pugelovia.

b. Explain how opening trade affects domestic producers of this type of product in Pugelovia.


A. Consumers in Pugelovia are likely to experience two types of effects from the opening of trade. First, consumers gain access to the varieties of products produced by foreign firms, as these varieties can now be imported. Consumers gain from greater product variety. Second, the additional competition from imports can lower the prices of the domestically produced varieties, creating an additional gain for domestic consumers.

B. Producers in Pugelovia also are likely to experience two effects from the opening of trade. First, imports add extra competition for domestic sales. As we noted in the answer to part a,this is likely to force domestic producers to lower their prices, and some sales will be lost to imports. Second, domestic produces gain access to a new market, the foreign market. They are likely to be able to make additional sales as exports to consumers in the foreign market who prefer these producers’ varieties over the ones produced locally there.

Question:After reading the above statement and its solution what are some of the negative effects for consumers and producers (positive effects are explained in the solution).

Question 2. Analyze fig. 7.1 and fig 7.2 (focus on the production possibilities frontiers only and ignore the indifference curves). Try to explain the differences in economic growth of these four countries.

The diagrams are on the attached document.

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