Principles of Economics- Mankiw (5th) 177

Principles of Economics- Mankiw (5th) 177 - CHAPTER 9 A P P...

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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
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