Consider a country that imports a good from abroad. For each...

Consider a country that imports a good from abroad. For each of following statements, state whether it is true or false. Explain your answer. a. "The greater the elasticity of demand, the greater the gains from trade." b. "If demand is perfectly inelastic, there are no gains from trade." c. "If demand is perfectly inelastic, consumers do not benefit from trade."

Transcript

00:01 So here, let's just draw a market, right? i'm gonna start off by drawing a market between quantity and price.

00:06 I'm gonna draw a demand curve.

00:08 I'm gonna draw a supply curve.

00:10 But we also know that this country is importing, right? that means that the foreign good is low price, right? available at a low price.

00:24 So maybe the imported price is somewhere down here.

00:29 So in this situation, right? where are the gains from trade? this would be my domestic equilibrium, right? and i would have sort of my normal consumer and producer surpluses, right? like this.

00:44 And here would be, right? my trade equilibrium.

00:48 And you can see that the difference, if you again do the consumer and producer surpluses, is that this triangle here is my gains from trade.

01:00 Now we are going to think about changing the elasticity of demand, right? changing the elasticity of demand.

01:09 So what happens if i make the elasticity of demand larger? right? so let me draw a new demand curve that looks like this.

01:20 Not quite that steep.

01:21 So here is my new demand curve, right? this is my elastic demand.

01:27 And you can see with the elastic demand that the gains from trade actually expand 100%.

01:34 So a is true, right? as that demand curve gets flat, you can see that that gains from trade area is getting bigger and bigger and bigger...

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