Belgium has decided to end its policy of not trading with the rest of the world.

Question

Belgium has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing cinnamon, exporting steel, and neither importing nor exporting rugs. What are the effects?

A. Domestic producers of cinnamon are now better off, and consumers of cinnamon are worse off; producers of steel are worse off, and consumers of steel are better off; both producers and consumers of rugs are unaffected

B. Domestic producers of cinnamon are now worse off, and consumers of cinnamon are better off; producers of steel are better off, and consumers of steel are worse off; both producers and consumers of rugs are unaffected

C. Domestic producers of cinnamon are now worse off, and consumers of cinnamon are better off; producers of steel are worse off, and consumers of steel are better off; both producers and consumers of rugs are unaffected.

D. Domestic producers of cinnamon, steel, and rugs are worse off and consumers of cinnamon, steel and rugs are better off.

A. Domestic producers of cinnamon are now better off, and consumers of cinnamon are worse off; producers of steel are worse off, and consumers of steel are better off; both producers and consumers of rugs are unaffected

B. Domestic producers of cinnamon are now worse off, and consumers of cinnamon are better off; producers of steel are better off, and consumers of steel are worse off; both producers and consumers of rugs are unaffected

C. Domestic producers of cinnamon are now worse off, and consumers of cinnamon are better off; producers of steel are worse off, and consumers of steel are better off; both producers and consumers of rugs are unaffected.

D. Domestic producers of cinnamon, steel, and rugs are worse off and consumers of cinnamon, steel and rugs are better off.

Explanation / Answer

Answer : Option B is correct.

Belgium imports cinnamon. This means that in Belgium the demand for cinnamon is too high which create a gap between domestic demand and domestic supply. As a result the higher demand tend to import cinnamon in Belgium which decrease the domestic producer surplus of cinnamon and hence domestic cinnamon producers are worse off but consumers are better off as they are getting enough supply of cinnamon to meet their demand.

Belgium exports steel. This means that after ending trade restrictions the domestic steel producers export steel as world price is higher than the domestic price which increase the price level of steel in domestic country. As a result the domestic producer surplus increase but consumer surplus decrease. This means here that domestic steel producers are better off but consumers are worse off.

Belgium does not export or import rug. This means that there has no impact of ending trade restriction on both producer surplus and consumer surplus. Hence both rug consumers and rug producers remains unaffected after ending trade restrictions in Belgium.

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