If Px/Py exceeds the equilibrium relative Px/Py with trade
A)the nation exporting commodity X will want to export more of X than at equilibrium
B)the nation importing commodity X will want to import less of X than at equilibrium
C)Px/Py will fall toward the equilibrium Px/Py
D)all of the above

Question

Quizplus · Accepted Answer

If Px/Py exceeds the equilibrium relative Px/Py with trade, it means that the price of X is relatively higher compared to the price of Y in the domestic market than in the world market. This will lead to an increase in the quantity of X demanded domestically and a decrease in the quantity of X supplied domestically. As a result, the exporting nation will want to export more of X than at equilibrium, while the importing nation will want to import less of X than at equilibrium. This will cause the price of X to fall domestically and rise in the world market, thus bringing Px/Py back towards the equilibrium level. Therefore, all of the above options are correct.

If Px/Py Exceeds the Equilibrium Relative Px/Py with Trade