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Econ+102+lecture+23%2C+4-5-12+-+Distribution+of+gains+from+trade copy

Econ+102+lecture+23%2C+4-5-12+-+Distribution+of+gains+from+trade copy

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Lecture 23: Trade 2 –  The distribution of gains from trade Econ 102, Winter 2012 4/5/2012 1 Required reading : Ch 5: pp. 127 -136 Ch 5 apdx: (all) 147-152 (may skip quotas, pp. 136-137)
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Outline 1. Trade and intra-economy distribution a. Consumer and producer surplus “review” b. The “winners” and “losers” of trade in a market c. The essential argument for trade d. Trade regulation and welfare 2. Trade and inter-economy distribution a. Trade price and potential gains from trade b. Terms of trade 4/5/2012 2
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Market surplus Last class, we argued that in every situation where there is comparative advantage (CA), trade can make both trading partners “macroeconomically better off” a. Possible to consume more of both goods, post- trade b. Possible to reach a higher social welfare We can also show this on a market-by-market basis: how big are the gains to trade in both countries, for producers and consumers alike? . Need to delve into the measurement of market surplus 4/5/2012 3
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Market surplus Basic definitions (from Econ 101, or Ch 5 appendix): Consumer Surplus : difference between willingness- to-pay (as given by the demand curve) and the actual price paid Producer Surplus : difference between willingness-to- sell (as given by the supply curve) and the actual price paid P Q Domestic CS and PS in autarky: Peppers in Argentina 4
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Market surplus Notice that if our curves are linear, then CS and PS are easy to calculate. Price Quant Supply Demand X Y Z M The area of a triangle is ½ * height * width N 0 5
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Market welfare under trade Trade generates gains for each country because each country’s export price rises, import price falls. Argentina imports peppers, so the world price PW is lower than the autarkic price PA P Q Peppers in Argentina (import- competing) Pre- Trade Post- Trade CS PS 6 4/5/2012
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Intra-economy distribution The sum of CS + PS is larger under free trade than under autarky Notice two things that happen in the movement from autarky to free trade: 1. Domestic producers are worse off (they’re the “losers”) The real domestic return to producing peppers in Argentina fell. This loss was entirely captured by consumers: a re- allocation, not a macroeconomic loss 2. Domestic consumers are better off (they’re the “winners”) 4/5/2012 7
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Intra-economy distribution In the case of exports, we can draw the same type of picture: Argentina exports beef, so the world price PW is higher than the autarkic price PA P Q Beef in Argentina (export) Pre- Trade Post- Trade CS PS 8 4/5/2012
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Intra-economy distribution In both cases, we see again that there are aggregate gains from trade But: not
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