Question

When a nation begins to allow imports, consumers lose and producers gain. Explain why this is correct. Demonstrate in a graph.

Answer 1

We assume that the prices in the economy before the trade were higher than the world prices whihc led to importr of goods in the economy after the opening of trade. so since the price of the good falls afer the trade starts , we see that the producers in a way are able to sell the good at the low price if they compete with the world price because if they dont , then the demand for their good would be less than the imported one . so this would lead to losses incurred by them .

on the other hand , the consumers were paying a higher price before the trade started , and since the world price is lower, the consumer surplus which is the difference between the price of the gopod and the consumer's willingness to pay for the good would increase , so the consumer would be benfitted in this trade.

the graph shows the domestic demand and supply of the importing economy and that world price is less than P1 whic is the price before the trade.

so we see that the (d) part of the graph is the imports ie the domestic demand which is fulfilled by the imports.

consumer surplus isgiven by the area under the demand curve and above the price line whereas the producer surplus is given by the area above the supply curve and below the price line. so after the trade, we see that the consumer surplus rose from (a+b) to (a+b+d)

and the producer surplus decreases from (b+c) to c

so the consumer gain and producers loss in an importing economy.