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Trade and Welfare

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.

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Trade and Welfare

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  1. 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

  2. IMPORTS - 120 A B B P* = $.60 World price 100 40 160 What happens with trade? What are the welfare effects of trade? P DECREASE IN PRODUCER SURPLUS S INCREASE IN CONSUMER SURPLUS INCREASE IN TOTAL SURPLUS P* = $1 D Q WATER MARKET Trade and welfare

  3. EXPORTS - 90 WORLD PRICE P = $12 Y X Y 100 60 150 WHAT HAPPENS WITH TRADE? WHAT ARE THE WELFARE EFFECTS? The diagram below shows the U.S. domestic market for flags. No trade is taking place. INCREASE IN PRODUCER SURPLUS P INCREASE IN TOTAL SURPLUS DECREASE IN CONSUMER SURPLUS S P* = $10 D Q FLAG MARKET Trade and welfare

  4. 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

  5. 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

  6. 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

  7. DEADWEIGHT LOSS = 1/2(Z$10x90) = Z$ 450 DEADWEIGHT Domestic Price after Tariff P =Z$ 40 P* =Z$30 20 60 130 180 THE DOMESTIC MARKET FOR WATER GOVERNMENT REVENUE = Z$ 700 WHAT HAPPENS WHEN A TARIFF IS IMPOSED ? DECREASE IN CONSUMER SURPLUS INCREASE IN PRODUCER SURPLUS INTERNATIONAL TRADE BEGINS P S P* =Z$50 World price D Q WATER MARKET Trade and welfare

  8. DEADWEIGHT LOSS 1/2($.20X50) = $5 DEADWEIGHT LOSS Domestic Price after Tariff P = $.80 P* = $.60 World price P = $.40 World price after tariff 40 70 140 160 GOVERNMENT REVENUE DOMESTIC PAID= $14 THE DOMESTIC MARKET FOR WATER WHAT HAPPENS WHEN A TARIFF IS IMPOSED ? GOVERNMENT REVENUE FOREIGN PAID = $14 DECREASE IN CONSUMER SURPLUS INCREASE IN PRODUCER SURPLUS INTERNATIONAL TRADE BEGINS P S P* = $1 D Q WATER MARKET Trade and welfare

  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

  10. Arguments against trade • 1) Jobs argument. • 2) National defense argument. • 3) Infant industry argument. • 4) Unfair competition argument. Trade and welfare

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