Price Price

Sx
Price
S1

d d
Pf
a b c c
P1

Qty Exported D2
D1 Dx

Qt D
Qty Qt Qty Qt Qty

Fig a Fig b Fig c

a. Figure a shows the demand and supply curve for country I with Demand as D1 and supply as
S1. Figure c shows the demand of country D2 and Figure b shows the combined Demand and
Supply curve for both countries together. The free trade equilibrium price is Pf the price at
which the quantity of exports supplied by country 1 is the same as quantity demanded by
country 2 as imports
b. The effect of the shift from no trade to free trade in Country 1 is that its producer surplus
increases and this can be shown by the areas a plus b plus c whereas the consumer surplus falls
by areas a plus b. The graph indicates that there is a net national gain from trade which is listed
as area c. As Country II does not produce any Murky Way candy bars, there is no producer
surplus and their consumer surplus is increased by the area d and this is considered as a net
national gain from trade as well. In both countries, there is a net national gain from trade.