With free trade, the market for a particular good or service is in equilibrium when:

Question

Quizplus · Accepted Answer

With free trade, the market for a particular good or service is in equilibrium when the price in the world market is equal to the price in the domestic market. This is because in a free trade scenario, goods can move freely between the domestic and world market, and if the price in the domestic market is higher than the price in the world market, then producers will find it profitable to export their goods, leading to an increase in supply and a decrease in price in the domestic market until it is equal to the world market price. Similarly, if the price in the domestic market is lower than the price in the world market, then demand will increase in the domestic market as consumers prefer the cheaper domestic goods, leading to an increase in price in the domestic market until it is equal to the world market price. At this equilibrium price, domestic producers are competitive with foreign producers and there are no incentives to export or import, making it the point of equilibrium.

With Free Trade, the Market for a Particular Good or Service