nd Losers

de
and Losers
rade
The Winners and Losers
from Trade
 Importing Country
Domestic Equilibrium is more than The
World Price
When the domestic price is higher than the world price, it creates a price floor. In this
scenario, the domestic market is pricing goods or services at a level that exceeds the
prevailing international market price. This situation can have several economic

The Winners and Losers

implications:

Increased Imports: The higher domestic price may make imported goods more
attractive to domestic consumers and businesses. As a result, there could be an increase

from Trade
in imports as consumers opt for cheaper foreign alternatives.

Pressure on Domestic Producers: Domestic producers may face challenges as they

compete with cheaper foreign goods. This can lead to a decline in domestic production,
job losses, and potential economic difficulties for the affected industries.

Consumer Impact: While domestic producers may face challenges, consumers may
benefit from access to lower-priced imported goods. However, this benefit must be
weighed against potential negative effects on domestic industries and employment.
 Exporting Country
Domestic Equilibrium is less
than the World Price
it creates a price ceiling. Several potential outcomes and economic implications may arise in this scenario:
Export Incentives: If the domestic price is lower than the world price, domestic producers may find it profitable to
The Winners and Losers
export their goods to other countries where they can fetch a higher price. This can lead to an increase in exports.

from
Domestic Producers: Domestic producers are Trade
better off since they can sell their product in foreign market and make
better profit.
 Graphs
Domestic price>world Price Domestic price<world Price
Domestic price>world Price
Producer surplus Consumer surplus Total surplus

Before Trade B+C A A+B+C

After Trade C A+B+D A+B+C+D

 When a country allows trade and becomes an importer of goods,

domestic consumers are better off and domestic producers are
worse off.
 There’s a gain of area D which is nothing but imports.
 Trade increases the economic well-being of a nation because the
gains of the winners exceed the losses of losers.
 Domestic price<world Price

Producer surplus Consumer surplus Total surplus

Before Trade C A+B A+B+C
After trade B+C+D A A+B+C+D

 When a country allows trade and becomes an exporter of a good,

domestic producers are better off and domestic consumer are worse off.
 There’s an increase of area D which is nothing but increase in the producer surplus.
 Trade increases the economic well being of a nation because the gains of
the winners exceed the losses of losers
 Tariffs
Tariffs are taxes or duties imposed by a government on imported goods. They are a form of trade barrier that can
be used for various purposes, such as protecting domestic industries, raising revenue for the government, or
addressing trade imbalances.

Best way of understanding tariffs would be through an example:-

 Tariffs
 In the domestic market, the domestic equilibrium price and
quantity are $1,000/board feet, and 40 million board feet,
respectively. This is denoted as PD = $1,000 and QD = 40
million.

 In this case, the world price, or PW is substantially lower than

the domestic price. While this is not always the case, there is no
incentive to import if PW is greater than PD
Tariffs
 With access to imports with prices as low as $400,
American consumers will purchase significantly more
lumber. Their quantity demanded will increase to 70
million units (40 million more than the domestic
equilibrium). These consumers are significantly better
off with the new access to cheap lumber.

 Domestic producers, on the other hand, lose a large

degree of surplus from the imports. Whereas before they
supplied 40 million board feet of lumber at $1000, now
they can only supply 10 million board feet.
 Tariffs
 Suppose the government enacts a
$400 tariff on imports to restrict
competition. A tariff is a tax imposed on
important goods or services. This creates an
equilibrium price equal to $800 (world price
+ the $400 tariff).

 While this price is still below the domestic

equilibrium, more domestic firms are now
able to compete. In the new equilibrium,
total quantity is 50 million board feet, 30
million of which are domestic. This means
that imports have dropped from 60 million to
20 million board feet.
Tariffs
 Consumers originally purchased 70 million board
feet at $400 each, and now purchase 50 million at
$800 each.

 Domestic producers now sell 20 million more units

for $400 more than previously.

 In this situation, domestic producers are better off, as

they are now able to sell 20 million more units.
Consumers, on the other hand, are worse off, as they
face a higher price.
 Tariffs
Effects of the tariff on each of the market players

Consumer Producer Government Total

surplus surplus surplus surplus
E
F
Before Tariff A+B+C+D+E+F G None A+B+C+D+E+F G
+G

After tariff E+F G+A C A+C+E+F+G

 Tariffs
Effects of the tariff on each of the market players
Consumers
Consumers originally purchased 70 million board feet at $400 each, and now
purchase 50 million at $800 each.
The change in surplus is represented by a decrease in areas A + B + C + D
E
Producers (Domestic) F

Domestic producers now sell 20 million more units for $400 more than previously G

(note that the tariff only applies to imports, not domestic production).
The change in surplus is represented by an increase in area A

Government
The government charges a $400 tariff on the 20 million remaining imported board
feet.
The change in surplus is represented by an increase in area C

Net Result
The government and producers gained areas A and C as a result of the tariff, but
consumers lost areas A, B, C, and D. Overall, the policy created a deadweight loss
equal to area B and D.