Although international trade leads to substantial net benefits, not everyone gains from international trade. Which of the following groups is most likely to lose from trade?

A. businesses that use inputs and products that are being imported

B. consumers

C. businesses outside the import sectors

D. the workers and companies in the industries that compete with the imports

The correct answer is D. the workers and companies in the industries that compete with the imports.

Explanation:

To analyze the effects of free trade on welfare, Icelandic economists start from the assumption that Iceland is a small economy compared to the rest of the world. This assumption of small economy means that Iceland's acts have little effect on world markets. Specifically, any change in your trade policy will not affect the world price of textiles. It is said that Icelanders are price takers in the world economy. That is, they accept as given the world price of textiles. Iceland can be an exporting country if you sell textiles at this price or an importing country if you buy textiles at this price.

The small economy assumption is not necessary to analyze the gains and losses of international trade. But Icelandic economists know from experience (and why they studied a previous article) that making simple assumptions is an essential part of building a useful economic model. The assumption that Iceland is a small economy simplifies the analysis and the basic lessons do not change in the most complicated case of a large economy.