Question

Suppose that the world price of rice is 40 cents a kilogram, China does not trade internationally, and the equilibrium price of rice in China is 60 cents a kilogram. China then begins to trade internationally. a. How does the price of rice in China change? b. Do Chinese consumers buy more or less rice? c. Do Chinese rice growers produce more or less rice? d. Does China export or import rice and why?

Short answer

a. The price drops to 40 cents. b. Consumers buy more rice. c. Producers produce less rice. d. China imports rice due to lower prices and higher demand.

Step-by-step solution

Determine Price Change

Since the world price is lower than China's equilibrium price, the price of rice in China will decrease to match the world price once China begins to trade internationally. Therefore, the new price of rice in China will be 40 cents a kilogram.

Analyze Consumer Behavior

At a lower price of 40 cents per kilogram, Chinese consumers will find rice cheaper, which will lead to an increase in the quantity of rice demanded. Consumers in China will buy more rice because it is now cheaper.

Analyze Producer Behavior

Chinese rice growers, facing a lower market price of 40 cents per kilogram, will earn less for the rice they sell. This decrease in price will lead to some producers reducing their production or exiting the market, so Chinese rice growers will produce less rice.

Determine Trade Flow

Since the world price is lower than China's previous equilibrium price, and Chinese consumers are buying more rice while Chinese producers are producing less, China will need to import rice to satisfy the increased demand. China will import rice because the domestic production is insufficient to meet the increased demand at the lower price.

Key concepts

world price

The world price is the international price at which a commodity, like rice, is traded globally. It's determined by the global supply and demand for that product. In this scenario, the world price of rice is 40 cents per kilogram.
The world price influences a country's domestic market when it begins to trade internationally. If the world price is lower than a country's domestic price, as with China where the domestic rice price is 60 cents per kilogram, the domestic price will drop to align with the world price. This makes the international trade beneficial for consumers who can now purchase rice at a lower price, but it can present challenges for producers who may have to sell their goods at a less profitable rate.

consumer behavior

Consumer behavior refers to how individuals decide to spend their money based on changes in prices and other economic factors. When China opens up to international trade, the price of rice drops from 60 cents to 40 cents per kilogram.
This price decrease means that rice becomes more affordable for Chinese consumers, leading to an increase in the quantity of rice demanded. Simply put, as the price of a good decreases, consumers are able to and tend to buy more of it. In this case, the lower world price stimulates greater demand for rice among Chinese consumers.

producer behavior

Producer behavior looks at how producers react to changes in the market, particularly price changes. When China begins trading internationally and the price of rice drops to the global market price of 40 cents per kilogram, Chinese rice producers earn less.
As a result, some farmers may not find it profitable to continue producing rice or may reduce their output. This is because their revenue per kilogram of rice decreases, potentially leading to some producers exiting the market or shifting to produce other commodities that might offer better returns. Overall, this leads to a reduction in the quantity of rice produced domestically.

import and export dynamics

Import and export dynamics refer to the flow of goods between countries as they engage in international trade. In this example, when China opens up to trade and the rice price drops to 40 cents per kilogram, the domestic demand for rice increases, while the domestic production decreases.
This imbalance means that the extra demand must be met through imports, making China an importer of rice. Countries typically import goods when their domestic production cannot satisfy the local consumption needs at a competitive price. Thus, China imports rice because it is more economical to purchase it from the global market than to produce it domestically.