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

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

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 EXPORTS - 90 INCREASE IN TOTAL SURPLUS DECREASE IN CONSUMER SURPLUS S WORLD PRICE P = $12 X Y 60 Y 150 P* = $10 100 D Q FLAG MARKET Trade and welfare

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

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

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

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

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