Answer to Question #168278 in Microeconomics for Chhavi Nagar

Question

"Greater the price elasticity of demand,greater is the the gains from trade".Is this statement true or false for a country that imports the commodity from abroad?Justify and logically analyze your argument .Draw graphs if necessary

Answer 1

Solution:

The statement is true.

This is because greater price elasticity of demand means that the demand for a particular product is highly elastic and greatly influenced by price changes.

The increased prices bring about a more than proportionate decrease in the demand for imports and less is spent on imports in revenue terms hence improving the trade balance, resulting in greater gains from trade.

This can be depicted by the below diagram: