PARTIAL EQUILIBRIUM MODEL

1: AUTARCHY

a) Depict Autarchy Prices and Output in HOME and FOREIGN. Compare.

b) Show the social surplus in each country by identifying Consumer and Producer Surpluses.

c) Explain why, in autarchy, the unregulated outcome (under perfect competition) maximizes social surplus. Prove that the claim is true.

2: FREE TRADE: now suppose we open to free trade. (Note: this is the Big country case)

a) Depict the Excess DEMAND and SUPPLY curves. Then illustrate the free-trade equilibrium output, consumption, and imports/exports for HOME and for FOREIGN. Use the 3-pane figure.

b) Identify the new Consumer, Producer and Private Surpluses in Home and Foreign. Do they rise fall? Explain what is happening and why.

c) Show and explain why both countries can Gain from Free Trade. Give the intuition.

3: FREE TRADE: Suppose FOREIGN's production demand curve rises (eg shifts right/up)

a) Show what happens to FOREIGN's ED-ES curve. Explain

b) What happens to free-trade prices, equilibrium output, consumption, and imports/exports in each country. Show in a diagram and explain.

c) Does HOME surplus rise? Show and explain. EG identify what happens to consumer and producer surpluses in Home. Relate to Terms Of Trade.

d) Does FOREIGN surplus rise? Show and explain. EG identify what happens to consumer and producer surpluses in Foreign. Relate to the Terms Of Trade.