Question

Suppose that the current international price of wheat is \(6 per bushel and that the United States is currently exporting 30 million bushels per year. If the United States suddenly became a closed economy with respect to wheat, would the domestic price of wheat in the United States end up higher or lower than \)6?

1. Higher.

2. Lower.

3. It will stay the same.

Short answer

The correct option is: b) Lower

Step-by-step solution

Step 1. Reason why a country exports goods

When a country opens up its economy, importing or exporting depends on the world price. If the world price is higher than the domestic price of a good, the country will export that good, and if the world price is comparatively lower, the country will import that good.

Thus, if a country exports, the producers get higher prices by trading in the international market.

Step 2. Explanation for the answer

When the United States becomes a closed economy, the producers no longer will get higher prices from exporting. Thus, the United States ends up getting a lower price than $6.The surplus will be sold in the domestic market at a lower price.