Question

Compare the total surplus TS in a market with no trade at P_dom to a market with imports eP_imp < P_dom and another market with exports eP_exp > P_dom. Explain which groups win and which lose in the import and export markets compared to the autarky market.

Answer 1

Ans) When there is no trade, consumers consumer what the domestic producers produce at the domestic market price.

-- When world price is below domestic price, country imports goods. This decreases the price. Which hurts domestic producers as they have to sell at lower price while it benefits consumers because they pay lower price. That is there is an increase in consumer surplus while there is a decrease in producer surplus. But increase in consumer surplus is more than the decrease in producer surplus and therefore, there is net increase in total surplus (i.e consumer surplus + producer surplus).

-- When world price is above domestic prices, country exports goods. This increases price. Which hurts domestic consumers while it benefits domestic producers. But the benefit to producers is more than the loss to consumers and therefore there is net increase in total surplus.

So, we see that whether country imports goods or exports good, there is always increase in total surplus. That is, trade is always beneficial.