The overall welfare effects of trade are ________ if ________.

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BlackTom AI · Accepted Answer

To unpack the statement, we consider what the question is asking: the overall welfare effects of trade and under what condition they are considered positive.
Option A: 'negative; some people are made worse off by trade' This focuses on potential losers but ignores the standard economic condition for positive overall welfare, which requires compensation possibilities. By itself, this option asserts negativity without acknowledging potential gains that could offset losses, making it incomplete as a general rule.
Option B: 'positive; the domestic economy grows faster than do foreign economies' This compares growth rates between countries and presumes that faster growth implies overall positive welfare from trade. However, trade welfare depends on net gains and the possibility of compensation, not simply relative growth rates between economies. This option misstates the standard criterion by tying welfare to a comparison of growth rather than net gains and compensation.
Option C: 'positive; more people gain from trade than lose from it' This captures a common intuition about trade—net benefits—but it is not the precise condition that guarantees overall welfare when losses can be compensated. The crucial idea is not just the count of winners versus losers, but whether the gains can be used to compensate the losers while maintaining an overall improvement in welfare for the winners and still be better off overall.
Option D: 'negative; those who lose can compel those who gain to compensate them for their losses' This reverses the standard principle. Even if compensation is possible, the statement asserts a negative outcome as the overall effect, which contradicts the conventional analysis that positive potential exists when gains can compensate losses. It misattributes the effect by focusing on coercive compensation rather than net welfare.
Option E: 'positive; those who gain can compensate those who lose and still be better off' This aligns with the classic concept of the potential for Pareto improvements through trade: if the gains from trade are large enough that, through redistribution or compensation, losers can be compensated, the overall welfare is positive for the economy. It accurately expresses the condition under which trade is welfare-enhancing as a whole.

In summary, A underestimates the possibility of net gains; B shifts focus to growth rates rather than net welfare with compensation; C emphasizes the count of winners but ignores the compensation mechanism; D wrongly frames the outcome as negative despite possible compensation; E correctly states the standard welfare condition that gains can offset losses and still leave everyone better off, reflecting the Pareto-improving or at least Pareto-dominant viewpoint when compensation is feasible.

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The overall welfare effects of trade are if .

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