ec340ch5 (2) - We can now measure the welfare effects for...

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We can now measure the welfare effects for producers and consumers under free trade. Since price has fallen under free trade, we would expect this to be good for consumers and therefore consumer surplus to increase. Consumer surplus increases by b+d’ in the next figure. Similarly, a lower price is worse for producers so we would expect producer surplus to fall. Producer surplus falls by b’ in the next figure. At lower world price, consumer surplus increases to a+b+d an increase of b+d from no-trade At lower world price, producer surplus falls to c a decrease of b from no-trade Gain in trade is triangle d with area equal to ½(M 1 )(P A -P W ) Consumers gain more than the producers lose, indicating total Home welfare increased. By looking at the changes in surplus we see: Rise in consumer surplus + (b+d) Fall in producer surplus - b Net effect on Home welfare + d ‘d’ is a measure of the gains from trade for the importing country due to free
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This note was uploaded on 02/14/2012 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.

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ec340ch5 (2) - We can now measure the welfare effects for...

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