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GAINS FROM TRADE FOR AN IMPORTING AND AN EXPORTING COUNTRY

GAINS FROM TRADE FOR AN IMPORTING AND AN EXPORTING COUNTRY


Hello everyone In this session we will be
looking at gains from trade both, for a country that exports a good, and a country that imports a good The first case is for the importing country when this economy is closed demand & the supply functions at
home will determine the equilibrium price and in this case, it is Pe Now given this equilibrium price what are the consumer and the producer surplus? The consumer surplus is the
area below the demand function and above the equilibrium price just Pe in this case Consumer surplus is A The producer surplus is The producer surplus is the
area above the supply function and below the equilibrium price so it’s given by B+C The total surplus for this country is A+B+C Now what happens when this country opens up to trade? Well the world price, which is given by Pw in this case is below the equilibrium price, Pe since the good is cheaper in the world market the country would want to import the good So at the world price Pw, this is the demand, this is the supply The access demand is how much the
country would import from the world market After [x] opens up to trade what is the consumer surplus? The consumer surplus in
this case would be given by the area below the demand function and above the equilibrium price as operating for this economy now, right So for this economy, it faces the world prices So after trade, the consumer
surplus is given by A+B and then there’s another triangle, D So it’s A+B+D What about the producer surplus? Well that’s given by the area above the supply function below the world price So this is your producer surplus, C The total surplus in this case is A+B+C+D So what is the change in consumer surplus? Well it’s B+D and it’s positive What about the producer surplus? Well the produce surplus declines by the amount B This is the area which is
captured by the consumer’s [x] So the positive B & the negative B
are exactly the same areas So what is the change in total surplus? Well it is [x] D So this is the area that is the gain from trade for this country that imports this good This intuitively makes sense,
as a price for the good falls consumers would benefit from this lower price and the producers would now lose out because the value of the good
that they sell has gone down It’s gone down from Pe to Pw So the producers would lose But given that consumers are gaining much more than the producers are losing overall, the country gains from trade and this is equal to the triangle Now what about the exporting country Well, before it opens up to trade again, the demand & the supply function at home would determine what the global price is And the consumer surplus, before it opens up to trade is given by the area below the demand function above the equilibrium pricee which is A+B Producer surplus is the area above the supply function and below the equilibrium price which is C So the total surplus is A+B+C What about after trade? Well after trade, since this
country is exporting the good the world price is higher than the equilibrium price Since producers can get a
higher price in the world market they would like to export the good So this is the [x] supply for this good and this is the demand, so there’s excess supply And what happens to this excess supply? Well, this is exported to the world market So what is the consumer surplus, after trade? Well it’s the area below the demand function and above the equilibrium price So this is A What about the producer surplus? [x] is the area below the equilibrium price and above the supply function And so we have B+C and
there’s another triangle, D So what is the change in consumer surplus? Well consumers lose out the area B Producers gain the area B and they also gain an area called D After trade the total surplus was A+B+C+D So what is the change? Well the change is D, which is positive So again, for this country that exports a good there is gain from trade and that’s the area D Again, thinking about this intuitively as the prices of this good increases when the country opens up to international trade the producers get a higher
value for their good, so they gain and consumers lose out because now they have to pay
a higher price for their good Alright, that’s about it

Comments (5)

  1. These videos are very helpful! Thank you very much and please keep them coming.

  2. thank you so much. this helped a lot!!!

  3. can you calculate with numbers?

  4. Mam wonderful explanation ♥️

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