Question

1. Explain the effect that Monopolistic Competition has on international trade. Also, refer to your limitations.

2. Refer to the effects or consequences on the general balance of the tariff: small country case

Answer 1

As per policy we have to answer first question.

Answer-1) Monopolistic competition arises when an industry has numerous firms offering items that are similar however not homogeneous. Under the monopolistic competition the prices charged and the number of firms is affected by the size of the market. International trade helps in the creation of an integrated market which is huger than each country’s market. Thus the consumers are offered a greater variety of products and lower prices.

The international trade will cause the demand curve for the firm to shift outward because of a rise in foreign demand however there will be a limitation as it will cause the demand curve to shift back in due to the decline in domestic demand. As both these effects push the demand curve in opposite directions, thus the final impact will depend on the relative sizes of both the effects. The removal of barriers on trade, regardless of the size of these effects, would push the intra-industry trade to arise. Each nation would become an importer and an exporter of differentiated items that would be classified in the same industry