THE GAINS AND LOSSES OF AN IMPORTING COUNTRY

Now suppose that the domestic price before trade ts above the world price. Once again, after free trade is allowed, the domestic price must equal the world price. As Figure 3 shows, the domestic quantity supplied is less than the domestic quantity demanded. The difference between the domestic quantity demanded and the domestic quantity supplied is bought from other countries, and Isoland becomes a steel importer.

Figure 3 International Trade in an Importing Country

Once trade is allowed, the domestic price falls to equal the world price. The supply curve shows the amount produced domestically, and the demand curve shows the amount consumed domestically. Imports equal the difference between the domestic quantity demanded and the domestic quantity supplied at the world price Buyers are better off (consumer surplus rises from A to A + B + D), and sellers are worse off (producer surplus falls from B + C to C). Total surplus rises by an amount equal to area D, indicating that trade raises the economic well-being of the country as a whole

THE GAINS AND LOSSES OF AN IMPORTING COUNTRY

THE GAINS AND LOSSES OF AN IMPORTING COUNTRY

In this case, the horizontal line at the world price represents the supply of the rest of the world. This supply curve is perfectly elastic because Isoland is a small economy and, therefore, can buy as much steel as it wants at the world price Now consider the gains and losses from trade. Once again, not everyone benefits. When trade forces the domestic price to fall, domestic consumers are better off (they can now buy steel at a lower price), and domestic producers are worse off (they now have to sell steel at a lower price). Changes in consumer and producer surplus measure the size of the gains and losses. Before trade, consumer surplus is area A producer surplus is area B + C, and total surplus is area A + B + C. After trade is allowed, consumer surplus is area A + B + D, producer surplus is area C, and total surplus is area A + B + C + D. These welfare calculations show who wins and who loses from trade in an importing country. Buyers benefit because consumer surplus increases by the area B + D. Sellers are worse off because producer surplus falls by the area B. The gains of buyers exceed the losses of sellers, and total surplus increases by the area D. This analysis of an importing country yields two conclusions parallel to those for an exporting country.

• When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off, and domestic producers of the good are worse off.

• Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers.

Having completed our analysis of trade, we can better understand one of the Ten Principles of Economics in Chapter I: Trade can make everyone better off. If Loland opens up its steel market to international trade that change will create winners and losers, regardless of whether Isoland ends up exporting or importing steel In either case, however, the gains of the winners exceed the losses of the losers, so the winners could compensate the losers and still be better off. In this sense, trade can make everyone better off But will trade make everyone better off? Probably not. In practice, compensation for the losers from international.

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