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. 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

3. 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

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. 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

8. 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

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