In: Economics
5. International Trade and Welfare Economics
Draw a graph for each of the following situations. In each graph show the following: domestic price (PD), world price (PW), domestic quantity supplied (QSD), domestic quantity demanded (QDD), # of imports or exports (in terms of the QDD and QSD), consumer surplus, producer surplus, total surplus, and deadweight loss.
a. Market allowing free international trade where the domestic producers have comparative advantage in the good.
b. Market allowing free international trade where the domestic producer do not have comparative advantage in the good.
a) When there are free trade and domestic country si having comparative advantage then according to the first figure the CS is A, PS is B+C+D, here the domestic consumer loses whereas the domestic producer earns a surplus so the total surplus is D. so D is the area which gained from export by domestic producers.
b) In another situation when there is free trade with no comparative advantage means the world price is less than the domestic price, so the consumer surplus is A+B+D, Producer surplus C and the deadweight loss is E. Here the consumer benefited more due to cheap import where the producer loss B due to the high price of his product.