IBonomicsFree Trade – Importing CountrySL
Global EconomicsThis diagram illustrates how a country imports goods under free trade when the world price is lower than the domestic equilibrium price.
Curves and elements
- dd
- Dd: Domestic demand for the good (e.g., chips).
- sd
- Sd: Domestic supply of the good.
- pw
- Pw: World price, which is lower than the domestic equilibrium price.
- qd
- Qd: Quantity demanded at the world price.
- qs
- Qs: Quantity supplied domestically at the world price.
- imports
- Imports: The difference between Qd and Qs, filled by foreign producers.
Key explanations
- 1
In autarky (no trade), the domestic market reaches equilibrium where the domestic supply (Sd) intersects domestic demand (Dd).
- 2
When the world price (Pw) is lower than the domestic equilibrium price, consumers increase their quantity demanded to Qd, while domestic producers reduce their supply to Qs.
- 3
The difference between Qd and Qs is filled by imports from abroad, allowing domestic consumers to benefit from cheaper goods.
- 4
Consumers gain from lower prices and increased quantity consumed, while domestic producers may suffer losses due to lower prices and reduced sales.
- 5
Free trade allows the country to specialize based on comparative advantage, increasing overall economic welfare and efficiency.
Example exam question
Using a supply and demand diagram, explain how free trade leads to imports and benefits consumers in an economy.
Show example answer
When the world price is below the domestic equilibrium price, domestic consumers increase their demand while producers reduce supply. The shortfall between Qd and Qs is met through imports. Consumers benefit from lower prices and greater access to goods, aligning with the theory of comparative advantage.
