CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 183 Now consider the gains and losses from opening up trade. Clearly, not every-one benefits. Trade forces the domestic price to rise to the world price. Domestic producers of steel are better off because they can now sell steel at a higher price, but domestic consumers of steel are worse off because they have to buy steel at a higher price. To measure these gains and losses, we look at the changes in consumer and producer surplus, which are shown in Figure 9-3 and summarized in Table 9-1. Be-fore trade is allowed, the price of steel adjusts to balance domestic supply and do-mestic demand. Consumer surplus, the area between the demand curve and the before-trade price, is area A ± B. Producer surplus, the area between the supply curve and the before-trade price, is area C. Total surplus before trade, the sum of consumer and producer surplus, is area A ± B ± C. After trade is allowed, the domestic price rises to the world price. Consumer
This is the end of the preview. Sign up
access the rest of the document.
This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.