When chinas clothing industry expands the increase in world...

When China's clothing industry expands, the increase in world supply lowers the world price of clothing. a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that imports clothing, such as the United States. b. Now draw an appropriate diagram to show how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that exports clothing, such as the Dominican Republic. c. Compare your answers to parts (a) and (b). What are the similarities and what are the differences? Which country should be concerned about the expansion of the Chinese textile industry? Which country should be applauding it? Explain.

Transcript

00:01 All right, we're given in a scenario where there's an expansion in the supply by the chinese as a result of them, probably having developed cheaper ways of producing textile products.

00:17 Now, we are given two scenarios, one of an importing country, such as united states, and an exporting country.

00:29 We want to see the effect of the chinese expansion on both of these economies.

00:35 So let's start with an importing country.

00:39 So the united states is given as an example of an important, importing country.

00:45 So let's see.

00:47 If we are going to quickly label the diagram, draw up the diagram, we'll notice that the united states has a down on slopping demand curve.

00:59 For obvious reasons it's a consuming nation.

01:05 But because the supplier is the world, so we have the perfectly inelastic supply curve here because no particular nation determines the level of supply on the world market, okay, so it's a perfectly, it's not going to be an upward sloping supply it's going to be perfectly inelastic supply all right so we label that as q1 so if we are maybe let me just try to so for ease of clarity we just want to indicate the producer okay not both the producer as well as the consumer surplus so or the original state is us having this green shaded area as the consumer surplus and we have these blue shaded area basically as the producer surplus all right so that's the kind that's the state of affairs before the chinese expansion so what results then is from the chinese expansion is a shift in the supply curve to q1.

02:43 So from qo to q1, we now have, if this was s -o, then we now have s -1, the supply curve after the shift, all right, a positive shift.

02:59 Because the price has gone down, so you now have a new price level.

03:05 So if this was the original.

03:07 Equilibrium with po.

03:10 This is now the new equilibrium with p1, indicating a decrease in the prices.

03:17 So without having to crowd the graph, i just want to indicate that we can observe here that if this was the original, this was the original consumer surplus.

03:32 Now as a result of expansion, this extends now to this triangle...

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