The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is 5 million T-shirts. After reading Adam Smith's The Wealth of Nations while on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of $16. The number of T-shirts consumed in Textilia rises to 6 million, while the number of T-shirts produced declines to 3 million.
With the opening of the Textilian market to international trade, the price of a T-shirt in the nation falls to the world price of $16. This occurs because now the Textilian consumers have access to a wider range of T-shirts at a lower price from the global market.
As a result of this price decrease, the quantity of T-shirts consumed in Textilia rises to 6 million. This increase in consumption is driven by the fact that consumers can now purchase more T-shirts at a lower price, leading to higher demand.
On the other hand, the number of T-shirts produced in Textilia declines to 3 million. This decrease in domestic production occurs because some domestic producers may find it difficult to compete with the lower-priced imported T-shirts. As a result, they may either reduce their production or exit the market altogether.
Overall, the opening of the Textilian market to international trade results in an increase in T-shirt consumption and a decrease in domestic T-shirt production. The market price of the T-shirt adjusts to the world price, leading to a more efficient allocation of resources and potentially benefiting consumers by offering them a wider variety of products at lower prices. However, it may negatively impact domestic producers who cannot compete with the lower-priced imports.
This change in the market for T-shirts in Textilia can be analyzed step-by-step as follows:
Step 1: Equilibrium without trade
- Initially, Textilia does not allow imports of clothing.
- The equilibrium price of a T-shirt is $20, and the equilibrium quantity is 5 million T-shirts.
- This means that at a price of $20, the quantity demanded by consumers is equal to the quantity supplied by domestic producers.
Step 2: Opening the market to international trade
- After reading Adam Smith's The Wealth of Nations, the president of Textilia decides to open the market to international trade.
- As a result, the market price of a T-shirt falls to the world price of $16.
- This means that the price of T-shirts in Textilia will now be determined by the global market forces.
Step 3: Change in quantity demanded and supplied
- With the lower price of $16, the number of T-shirts consumed in Textilia rises to 6 million.
- At this lower price, consumers are willing to buy a larger quantity of T-shirts.
- On the other hand, the number of T-shirts produced in Textilia declines to 3 million.
- This decrease in production occurs because domestic producers may find it difficult to compete with lower-priced imported T-shirts.
Step 4: New equilibrium in the market
- Due to the opening of the market to international trade, the new equilibrium in the T-shirt market is reached.
- The market price is $16, and the quantity exchanged is 6 million T-shirts.
- At this new equilibrium, the quantity demanded by consumers is again equal to the quantity supplied by domestic producers, considering both domestic production and imports.