Trade and welfareslide 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 welfareslide 2 S D Q P Q* P* = $10 The diagram below shows the U.S. domestic market for wine. No trade is taking place. WINE MARKET

Trade and welfareslide 3 In the case of wine, let's suppose the world price is lower than the U.S no-trade price, say, $8.00 per bottle.

Trade and welfareslide 4 S D Q P Q* P* = $10 What happens with trade? What are the welfare effects of trade? WINE MARKET P* = $8 Q"Q'

Trade and welfareslide 5 S D Q P P* = $10 U.S. consumers gain b + d. U.S. producers lose b. Welfare rises by d. WINE MARKET P* = $8 Q"Q' d c b a

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

Trade and welfareslide 7 D Q Q $/Q Welfare changes due to imports of wine D Q $/Q S S No trade CS No trade PS World price Imports Gain in surplus New CS New PS

Trade and welfareslide 8 S D Q P Q* P* = $1500 The diagram below shows the U.S. domestic market for computers. No trade is taking place. COMPUTER MARKET

Trade and welfareslide 9 Suppose computers can be sold for $2000 each on the world market and trade is allowed. What happens with trade? What are the welfare effects of trade?

Trade and welfareslide 10 S D Q P Q* P* = $1500 U.S. consumers lose b. U.S. producers gain b + d. Welfare rises by d. COMPUTER MARKET P* = $2000 a b c d

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

Trade and welfareslide 12 D Q Q $/Q Welfare changes due to exports of computers D Q $/Q S S No trade CS No trade PS World price ExportsGain in surplus New CS New PS

Trade and welfareslide 13 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 welfareslide 14 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 welfareslide 15 Arguments against trade 1)Jobs argument. 2)National defense argument. 3)Infant industry argument. 4)Unfair competition argument.