- Suppose the world is divided into two regions, the Organization of Coffee Exporters (OCE) and the Club
of Coffee Importers (CCI). Both economies are roughly the same size. The diagrams below represent the
domestic markets for coffee in each region plus the world market (prices are in U.S. dollars per kg.):
a. Show how to measure the “gains from trade” in each region using these diagrams. Who are the winners
and who are the losers in each country? Do both countries get net gains? Or does one country gain at the
expense of the other? Analyze and explain.
b. Suppose that bad weather in the OCE reduces the supply of coffee. Analyze the effects graphically on
the world price and on economic welfare in both regions (i.e., who gains or loses)?
Sample Solution
