4.1 benefits of international trade

define free trade

occurs when there are no barriers to trade. It allows goods and services to be traded from one country to another without impediment. 

1. Before trade, how much do Scottish firms earn from selling coconuts?

2. Before trade, what is the 

   consumer surplus

    and the 

   producer surplus

   ?
   
   After trade, price decreases from P_E to … and the quantity of coconuts consumed in Scotland increases from Q_E to ... , where … are produced domestically and ... are imported. 
    

3. After trade, how much do Scottish firms earn from selling coconuts? And how much is spent on imports?

4. After trade, what is the consumer surplus and what is the producer surplus? 

1. Before trade, the 

equilibrium price

 and quantity of coconuts in Scotland is at P_Eand Q_E. 

Total revenue earned by Scottish firms is equal to P_E × Q_E.

Total revenue = b + c + e + f + g 

2. The consumer surplus is the triangle under the 

demand curve

 and above the equilibrium price P_E. 

Consumer surplus = a

The producer surplus is the triangle above the supply curve and under the equilibrium price P_E. 

Producer surplus = b + e 

3. After trade, price decreases from P_E to P_w, and the quantity of coconuts consumed in Scotland increases from Q_E to Q₂ where Q₁ are produced domestically and Q_2 − Q₁ are imported. 

4. Total revenue earned by Scottish firms after trade is equal to P_w × Q₁. 

Total revenue = e + f 

Total expenditure on imports is equal to P_W × (Q_2 − Q₁). 

Total expenditure = g + h 

5. The consumer surplus is the triangle under the demand curve and above the equilibrium price P_w. 

Consumer surplus = a + b + c+ d

The producer surplus is the triangle above the supply curve and under the equilibrium price P_w. 

Producer surplus = e 

draw graphs for exporting and importing nations’ markets for coconuts

Describe what happens to the philippines if they export coconuts

1. Before trade, what is the consumer surplus in the exporting nation? What about after trade?

2. Before trade, what is the producer surplus in the exporting nation? What about after trade?

3. What is the net benefit to the exporting nation from trade?

1. Before trade, what is the consumer surplus in the importing nation? What about after trade?

2. Before trade, what is the producer surplus in the importing nation? What about after trade?

3. What is the net benefit to the importing nation from trade?

Before trade —> made QE at PE

after free trade —> drives up prices from PE to PW

overall, more coconuts are produced in Philippines at higher prices

---

1. Consumer surplus of the the exporting nation before trade = a + b 

Consumer surplus after trade = a 

2. Producer surplus of the the exporting nation before trade = c 

Producer surplus after trade = c + b + d

3. As a result of trade, consumers lose consumer surplus area b. However, producers gain b + d. Area b is simply transferred from consumers to producers. 

Hence, the net benefit of the exporting nation from free trade = d 

4. Consumer surplus for the importing nation before trade = a 

Consumer surplus after trade = a + b + d 

5. Producer surplus for the importing nation before trade = b + c 

Producer surplus after trade = c 

6. As a result of trade for the importing nation, consumers gain consumer surplus b + d. However producers lose b. 

Area b is simply transferred from consumers to producers. 

Hence, the net benefit from free trade = d 

List benefits of international trade

1. increased competition

• drives firms to pursue least costly method of production and be efficient

2. lower prices

3. greater choice

4. aquisition of resources

5. more foreign exchange earnings

• refers to the financial gain made by selling goods and services or by exchanging currencies in global markets

• Trade provides countries, such as emerging economies, with the opportunity to access hard currencies (ex. USD)

6. access to larger markets

7. economies of scale (spread fixed costs across more and more units of output, decreasing average costs)

8. more efficient resource allocation

• each country can specialise in the production of good best suited for them

6. more efficient production

• countries can get raw resources cheaper

1. Before trade, how much do US firms earn from selling socks?

2. Before trade, what is the consumer surplus?

3. Before trade, what is the producer surplus?

4. After trade, the price decreases from USD 30 to …

5. After trade, the quantity of socks consumed in the USA increases from 6 million to ... pairs, where … pairs are produced domestically and … pairs are imported. Fill in the blanks in this sentence.

6. After trade, how much do US firms earn from selling socks?

7. After trade, what is the consumer surplus?

8. After trade, what is the producer surplus?

9. After trade, how much is spent on imports?

10. What are the net benefits to free trade?

1. Before trade, the equilibrium price is USD 30 and the quantity of socks is 6 million pairs.

Total revenue earned by US firms is equal to 30 × 6 million.

Total revenue = USD 180 million

2. The consumer surplus is the triangle under the demand curve and above the equilibrium price of USD 30.

Consumer surplus = c

Consumer surplus = 1/2 × 6 million × 30

Consumer surplus = USD 90 million

3. The producer surplus is the triangle above the supply curve and under the equilibrium price of USD 30.

Producer surplus = 1/2 × 6 million × 30

Producer surplus = USD 90 million

4. USD 20

5.After trade, the quantity of socks consumed in the USA increases from 6 million to 8 million pairs, where 4 million pairs are produced domestically and 4 million pairs are imported.

6. Total revenue earned by US firms after trade is equal to USD 20 × 4 million.

Total revenue = USD 80 million

7. The consumer surplus is the triangle under the demand curve and above the equilibrium price of USD 20.

Consumer surplus = 1/2 × 8 million × 40

Consumer surplus = USD 160 million

 8. The producer surplus is the triangle above the supply curve and under the equilibrium price of USD 20.

Producer surplus = 1/2 × 4 million × 20

Producer surplus = USD 40 million

9. Total expenditure on imports is equal to USD 20 × 4 million

Total expenditure = USD 80 million

10. The full benefit to the USA from importing socks is area a.

    Net benefits = 1/2 × 4 million × 10

    Net benefits = USD 20 million

define absolute advantage

A country has absolute advantage in the production of goods which it produces more efficiently than the rest of the world.

• it can make goods at a faster rate and higher quality

• ex. INdia has absolute advantage in providing call centres

what is comparative advantage theory?

states that two countries will gain from trade if they each choose to specialise in the production of the good with the lowest opportunity cost. 

• sources:

  • Factor endowments

    Factor endowments refer to the resources that a country has. Countries like India and China have large labour endowments, the USA is well-endowed with capital and Saudi Arabia is naturally resource-rich with crude oil.

  • Levels of technology. Some countries are able to increase productivity through improvements in technology. For example, Japan has developed robotic assembly lines to build cars and China is currently developing 6G so factories can be fully automated and operated remotely. Increasing levels and innovations in technology allow countries to produce more efficiently, providing them with a competitive edge over other countries. 

  Dictionary

how can NZ beenfit from trade if it can’t produce fruit or industrial goods that well?

• if it specialises in the production of the good its best at compared to other goods (with lowest OC)

what’s another way to explain Ricardo’s theory of comparative advantage?

even if a country was more efficient at producing every good than any other country (which is to say, it has absolute advantage), it can still benefit from trade. This is because even the most efficient country in the world will have some goods it produces comparatively better than other goods.

what are assumptions for theory of comparative advantage? what is the main goal?

goal: show that free trade leads to an overall incease in world output

assumptions

• There are only two countries.

• They only produce two goods (that are identical in quality)

• There is 

  full employment

   of resources in the best way.

• There is 

  perfect information

• Technology is constant.

• There are zero transport costs.