Trade and Welfare
In this section, we examine the effects on welfare of
international trade.
The approach taken here, is to use the devices of
Producer and Consumer Surplus.
The change in social welfare when trade is allowed
can be measured by the changes in producer and
consumer surplus.
Trade and welfare
slide 1
What happens with trade?
What are the welfare effects of trade?
P
P* = $1
DECREASE
S
INCREASE
IN IN
PRODUCER
SURPLUS
CONSUMER
SURPLUS
INCREASE IN
TOTAL SURPLUS
IMPORTS - 80
A
B
P* = $.60
World price
D
60
Trade and welfare
100
140
WATER MARKET
Q
slide 2
WHAT HAPPENS WITH TRADE?
P
The diagram below shows the U.S.
INCREASE
IN
domestic market
for flags.
No trade is
WHAT
ARE THE
WELFARE
PRODUCER
SURPLUS
taking
place.
EFFECTS?
P = $12
EXPORTS INCREASE
IN
DECREASE IN
90
TOTAL
SURPLUS
S
CONSUMER SURPLUS
WORLD
PRICE
Y
Y
X
P* = $10
D
60
100
150
Q
FLAG MARKET
Trade and welfare
slide 3
The next (hidden) slide shows in a dynamic way who
gains from trade when the world price is below the
domestic, no trade price.
Hidden slide
The next (hidden) slide shows in a dynamic way who
gains from trade when the world price is above the
domestic, no trade price.
Hidden slide
Summary and conclusions
Allowing trade in a good will always increase social
welfare (the sum of producer and consumer
surplus).
When a good is exported, suppliers gain and
consumers lose, compared to the no trade position.
When a good is imported, suppliers lose and
consumers gain, compared to the no trade position.
Trade and welfare
slide 8
P
The diagram
below
shows the
International
Trade
Begins
Small Country
domestic
market for water in
Zimbabwe
Zimbabwe. No
trade is taking place.
GOVT.
IMPORTS
REVENUE- 160
70700
Z$
S
World Price
P* = Z$50
P = Z$40
P = Z$30
Plus Tariff
Z$10
World Price
D
20
60 100 130 180
Q
WATER MARKET
Trade and welfare
slide 9
Arguments against free trade
Trade always increases welfare of an economy, so
long as welfare is measured by the sum of
producer and consumer surplus.
What, then, are the arguments against free trade?
Trade and welfare
slide 10
Arguments against trade
1)
Jobs argument.
2)
National defense argument.
3)
Infant industry argument.
4)
Unfair competition argument.
Trade and welfare
slide 11