Econ Trade Graph

Demand curve

Downward sloping curve showing the relationship between price and quantity demanded.

Supply curve

Upward sloping curve showing the relationship between price and quantity supplied.

Equilibrium price (Pe)

The price where supply and demand intersect in the domestic market.

World price (Pw)

The international price at which a country can trade a good.

Quantity demanded at world price

The quantity where the demand curve intersects the world price line.

Quantity supplied at world price

The quantity where the supply curve intersects the world price line.

Imports formula

Imports = Qd − Qs

Exports formula

Exports = Qs − Qd

How to identify imports on a graph

The horizontal distance between quantity demanded and quantity supplied at the world price.

Consumer surplus

Area above the price line and below the demand curve.

Producer surplus

Area below the price line and above the supply curve.

Consumer surplus location

Between the demand curve and the price line.

Producer surplus location

Between the supply curve and the price line.

Gains from trade

Additional surplus created when countries trade at the world price.

Location of gains from trade

Two triangles between supply and demand created when price moves from equilibrium to the world price.

When does a country import?

When the world price is below the domestic equilibrium price.

When does a country export?

When the world price is above the domestic equilibrium price.

Effect of lower world price

Consumers gain surplus and producers lose surplus.

Effect of higher world price

Producers gain surplus and consumers lose surplus.

Tariff

A tax imposed on imported goods.

Domestic price with tariff formula

Domestic price = Pw + tariff

Effect of tariff on price

Domestic price rises above the world price.

Effect of tariff on demand

Quantity demanded decreases because price rises.

Effect of tariff on supply

Domestic producers increase production due to higher price.

Imports with tariff formula

Imports = Qdtariff − Qstariff

Tariff revenue formula

Tariff revenue = tariff × imports after tariff

Tariff revenue graph location

Rectangle between the tariff price and world price across imports.

Who gains from tariffs

Domestic producers and the government.

Who loses from tariffs

Consumers.

Net national effect of tariff

Overall loss due to deadweight loss.

Deadweight loss

Loss of total surplus when efficient trades no longer occur.

Number of deadweight loss areas with tariffs

Two triangles.

Production deadweight loss

Triangle created when inefficient domestic producers increase production.

Consumption deadweight loss

Triangle created when higher prices cause consumers to stop buying.

Import quota

A government restriction limiting the quantity of imports.

Effect of quota on price

Domestic price rises until imports equal the quota.

Quota price condition

Qd − Qs = quota

Quota rent

Profit earned by holders of import licenses.

Quota rent graph location

Same rectangle where tariff revenue would appear.

Key difference between tariff and quota

Tariff revenue goes to the government, quota rents go to license holders.

Graph feature indicating a tariff

A new horizontal price line above the world price.

Graph feature indicating a quota

A price line above the world price where imports equal the quota.

How to draw a trade graph step 1

Draw supply and demand curves.

How to draw a trade graph step 2

Identify the domestic equilibrium price.

How to draw a trade graph step 3

Draw the world price as a horizontal line.

How to draw a trade graph step 4

Identify quantity demanded and supplied at the world price.

How to draw a trade graph step 5

Calculate imports as Qd − Qs.

How to draw a tariff graph step 1

Start with the world price line.

How to draw a tariff graph step 2

Add a higher price line equal to Pw + tariff.

How to draw a tariff graph step 3

Identify new quantities demanded and supplied.

How to draw a quota graph step 1

Start with the world price line.

How to draw a quota graph step 2

Move price upward until the gap between Qd and Qs equals the quota.

Autarky

A situation where a country does not engage in international trade.

Effect of trade relative to autarky

Trade generally increases total economic surplus.

Consumer surplus vs producer surplus

Consumers may still have more total surplus even if they lose some from a tariff.

Tariff vs quota similarity

Both raise domestic prices and reduce imports.

Tariff vs quota difference

Tariffs generate government revenue while quotas generate quota rents.