Gains of Trade

What is the driving force of trade?

• Absolute Advantage

• Comparative Advantage

• Competition

• Bargaining

If the rancher has comparative advantage in meat over potatoes, then the farmer has

• Absolute advantage in potatoes

• Absolute disadvantage in meat

• Comparative advantage in potatoes over everything

• Comparative advantage in potatoes over meat

Assume country A has absolute advantage in products X and Y compared to country B, then

• There can never be trade

• Country B must look for a niche market

• There can be trade, if opportunity costs are different

• There can be trade in any case

Absolute advantage determines

• Opportunities to trade

• How rich a country is

• A country's trade deficit

• How fast the economy grows

Consumer surplus for a consumer is

• WTP minus the actual price the consumer pays

• WTP minus the market price

• WTP minus the equilibrium price

• WTP minus WTA

The Total Surplus

• Depends on the market price

• Depends on the equilibrium price

• Depends on the actual price the consumer pays

• Does not depend on the price

If all trades are made at equilibrium price

• The total surplus is maximized

• The consumer surplus is maximized

• The producer surplus is maximized

• None of the above

At equilibrium, who gets the goods?

• The rich consumers

• The consumers who wants it most

• The consumers with highest WTP

• The consumer with best bargaining skills

If fewer goods are being sold than the equilibrium quantity, selling more

• Will increase only the consumer surplus

• Will increase only the producer surplus

• Will increase the total surplus

• Does not change the surplus

If the price is above the equilibrium price, lowering the price

• Brings new consumers into the market and makes the incumbent better off

• Brings new producers into the market and makes the incumbent better off

• Shifts the demand curve to the right

• Shifts the supply curve to the right