Exporting and Importing: Videos & Practice Problems

When a country opens up to international trade, it transitions from a state of autarky, where it does not engage in trade, to participating in the global market. In autarky, the country operates solely based on its domestic supply and demand, reaching an equilibrium price and quantity, denoted as p* and q*, respectively. At this point, consumer surplus is represented by the area above the price and below the demand curve, while producer surplus is the area below the price and above the supply curve.

The concept of comparative advantage is crucial in understanding international trade. It refers to a country's ability to produce a good at a lower opportunity cost than another country, which drives the decision to trade. Although we won't delve deeply into comparative advantage here, it is essential to recognize its role in facilitating trade.

Once a country engages in international trade, the focus shifts from the domestic price to the world price (WP), which is the price of goods in the global market. The domestic price becomes less relevant, serving primarily as a point of comparison to determine whether it is higher or lower than the world price. This comparison influences the quantities supplied and demanded domestically, as trade will occur at the world price.

In summary, understanding the transition from autarky to international trade involves recognizing how consumer and producer surpluses are affected, the significance of comparative advantage, and the shift in focus from domestic prices to world prices. This foundational knowledge sets the stage for analyzing specific examples of international trade and its impacts on domestic markets.

When the world price of a good is higher than the domestic price, it creates a scenario where international trade can significantly impact the domestic market. In this situation, the world price becomes the prevailing price in the market, leading to changes in both quantity demanded and quantity supplied. As the price increases, the quantity demanded by consumers decreases, while the quantity supplied by producers increases. This results in a surplus, where the quantity supplied exceeds the quantity demanded.

This surplus can be exported to other countries, where consumers are willing to pay the higher world price. Exports are defined as goods produced domestically and sold in international markets. The surplus generated in the domestic market can thus be transformed into exports, allowing producers to benefit from higher prices abroad.

To analyze the effects of this trade on consumer and producer surplus, we can break down the areas on a supply and demand graph. Initially, in a state of autarky (no trade), consumer surplus is represented by the area above the equilibrium price and below the demand curve, while producer surplus is the area below the price and above the supply curve. When trade opens up and the world price is established, consumer surplus decreases because consumers now face a higher price, reducing the area of surplus to just one triangle above the world price. Conversely, producer surplus increases significantly as producers can sell more at the higher price, expanding the surplus area to include additional sections of the graph.

In summary, while consumers may experience a decrease in surplus due to higher prices, producers benefit from increased surplus, leading to an overall increase in total surplus for the economy. This illustrates the concept of gains from trade, where the benefits to producers outweigh the losses to consumers, resulting in a net positive effect on the economy as a whole.

When the world price of a good is lower than the domestic price, a country will likely engage in importing that good. In this scenario, the domestic market is characterized by a demand curve and a supply curve, with the original equilibrium price and quantity established before international trade. Once trade is introduced, the lower world price leads to an increase in quantity demanded by consumers and a decrease in quantity supplied by domestic producers, resulting in a shortage.

This shortage is filled by imports, which are goods produced overseas and sold domestically. The amount of imports corresponds to the difference between the quantity demanded and the quantity supplied at the lower world price. As a result, consumers benefit from the lower prices and increased availability of goods, leading to an increase in consumer surplus. The consumer surplus is represented by the area above the price level and below the demand curve, expanding significantly due to the lower price.

In contrast, domestic producers experience a decrease in producer surplus, as they are now competing with cheaper imported goods. The producer surplus is defined as the area below the price level and above the supply curve, which shrinks as the price falls. The total surplus in the market, which is the sum of consumer and producer surplus, increases overall due to the gains from trade. The new total surplus includes the original surplus plus additional areas gained by consumers, demonstrating that the benefits to consumers outweigh the losses to producers.

In conclusion, while importing leads to a favorable outcome for consumers who enjoy lower prices and greater quantities, it negatively impacts domestic producers. However, the overall effect on the nation is positive, as the gains from trade result in a net increase in total surplus, indicating that the economy as a whole is better off. This dynamic is similar to the effects observed in export scenarios, where trade also leads to an increase in total surplus, albeit with different impacts on consumers and producers.