Trade and WelfareSlide 2Slide 3The next (hidden) slide shows in a dynamic way who gains from trade when the world price is below the domestic, no trade price.The next (hidden) slide shows in a dynamic way who gains from trade when the world price is above the domestic, no trade price.Summary and conclusionsSlide 9Arguments against free tradeArguments against tradeTrade and welfare slide 1Trade and WelfareTrade and WelfareIn 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 2ABSDQP100P* = $1What happens with trade?What are the welfare effects of trade? WATER MARKET60 140P* = $.60World priceIMPORTS - 80BINCREASE IN CONSUMER SURPLUSDECREASE INPRODUCER SURPLUSINCREASE INTOTAL SURPLUSTrade and welfare slide 3X YSDQP100P* = $10The diagram below shows the U.S. domestic market for flags. No trade is taking place. FLAG MARKET60 150EXPORTS - 90INCREASE INPRODUCER SURPLUSDECREASE IN CONSUMER SURPLUSINCREASE INTOTAL SURPLUSWORLD PRICEP = $12WHAT HAPPENS WITH TRADE?WHAT ARE THE WELFARE EFFECTS?YThe next (hidden) slide shows in a dynamic way who gains from trade when the world price is below the domestic, no trade price.Hidden slideThe next (hidden) slide shows in a dynamic way who gains from trade when the world price is above the domestic, no trade price.Hidden slideTrade and welfare slide 8Summary and conclusionsAllowing 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 9SDQP100P* = Z$50The diagram below shows the domestic market for water in Zimbabwe. No trade is taking place. WATER MARKET2060 180130World PriceP = Z$30World PricePlus TariffP = Z$40IMPORTS -160IMPORTS -70GOVT.REVENUE -Z$ 700International Trade BeginsSmall CountryZimbabweZ$10Trade and welfare slide 10Arguments against free tradeTrade 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 11Arguments against trade1) Jobs argument.2) National defense argument.3) Infant industry argument.4) Unfair competition
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