Trade and welfare slide 1

Trade and WelfareTrade 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 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 welfare slide 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 welfare slide 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 welfare slide 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'

dc

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 welfare slide 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 welfare slide 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 welfare slide 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* = $2000a

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 welfare slide 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 welfare slide 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 welfare slide 15

Arguments against trade

1) Jobs argument.

2) National defense argument.

3) Infant industry argument.

4) Unfair competition argument.