4.1 Benefits of International Trade

A country exports a good when the world price ($P_w$) is above the domestic equilibrium price ($P_d$). This is because domestic producers can earn more by selling abroad than by selling only at home.

Here, P_w = \200$pertonneand$P_d = $150$pertonne.Since$P_w > P_d$,domesticproducersprefertosellattheworldprice,generatingexportsupplyequaltothegapbetweenquantitysuppliedandquantitydemandedat$P_w$.

At the higher world price, domestic quantity supplied rises (movement up the supply curve) while domestic quantity demanded falls (movement down the demand curve). The resulting excess supply is sold abroad as exports.

The country becomes an exporter of soybeans. The correct answer is that domestic producers sell abroad at the higher world price, generating export revenue and foreign exchange earnings.

The question asks what trade role — exporter or importer — this country takes when P_w (\200) > P_d ($150)$.Thekeyruleis:exportsoccurwhen$P_w > P_d$;importsoccurwhen$P_w < P_d$.

"The country will become an importer" is wrong because imports occur when $P_w<P_d$. Here the world price is above the domestic price, so the opposite applies.

"The price difference is too small to matter" is incorrect — no such threshold exists in the standard trade model. Any $P_w>P_d$ is sufficient to trigger exports.

"Exporter only if domestic demand rises" is wrong because the export condition depends on $P_w$ versus $P_d$, not on whether domestic demand rises. Exports occur because supply exceeds demand at $P_w$, not because demand increases.

The remaining option — that the country exports soybeans because producers can sell at the higher world price — is correct.

The scenario describes a domestic firm that was sheltered from competition by tariffs. Once those tariffs are removed, foreign rivals enter and the domestic firm is forced to respond by investing in new technology and cutting input costs.

This is the increased competition benefit of trade. The key feature is competitive pressure — the domestic firm does not improve voluntarily; it does so because it risks losing customers to more efficient foreign rivals.

Increased competition is a dynamic efficiency gain — it changes firm behaviour over time. This is distinct from economies of scale (which requires output to grow) or resource acquisition (which is about importing inputs unavailable domestically).

The correct answer is increased competition, because the scenario's core logic is competitive pressure from foreign entry forcing the domestic firm to streamline operations.

The question asks which benefit of trade is best illustrated by a firm that improves efficiency only after foreign competitors enter its market following tariff removal.

"Greater consumer choice" refers to consumers gaining access to more product varieties — the scenario focuses on firm behaviour, not the range of products available to consumers.

"Acquisition of resources" is about importing inputs (e.g. raw materials or minerals) unavailable domestically. The scenario describes process improvements, not sourcing new resource inputs.

"Economies of scale" requires the firm to increase its output volume so that fixed costs fall per unit. The scenario says nothing about output expansion — the driver is competitive pressure, not scale.

Increased competition is the correct answer — the firm's efficiency improvements are a direct response to the threat of losing market share to foreign rivals.