As a nation opens up to free trade:
A) the relative prices of the traded products do not change.
B) the absolute prices measured in the domestic currency do not change.
C) the relative price rises in the export sector and falls in the import sector.
D) the export sector experiences a decline in demand.

Question

Quizplus · Accepted Answer

When a nation opens up to free trade, the relative price of goods and services will change. Specifically, the price of the traded products will adjust to the global market price, which may be higher or lower than the domestic price. This means that the relative price will rise in the export sector as the country can offer goods and services at a lower price and sell them competitively in the global market. Conversely, the relative price will fall in the import sector as imported goods and services become cheaper due to competition from international markets. Overall, this change in relative prices will result in a greater demand for the country's exports and a decreased demand for the imported goods.

As a Nation Opens Up to Free Trade