Before the North American Free Trade Agreement (NAFTA)...

Before the North American Free Trade Agreement (NAFTA) gradually eliminated import tariffs on goods, the autarky price of tomatoes in Mexico was below the world price and in the United States was above the world price. Similarly, the autarky price of poultry in Mexico was above the world price and in the United States was below the world price. Draw diagrams with domestic supply and demand curves for each country and each of the two goods. As a result of NAFTA, the United States now imports tomatoes from Mexico and the United States now exports poultry to Mexico. How would you expect the following groups to be affected? a. Mexican and U.S. consumers of tomatoes. Illustrate the effect on consumer surplus in your diagram. b. Mexican and U.S. producers of tomatoes. Illustrate the effect on producer surplus in your diagram. c. Mexican and U.S. tomato workers. d. Mexican and U.S. consumers of poultry. Illustrate the effect on consumer surplus in your diagram. e. Mexican and U.S. producers of poultry. Illustrate the effect on producer surplus in your diagram. f. Mexican and U.S. poultry workers.

Before the North American Free Trade Agreement (NAFTA) gradually eliminated import tariffs on goods, the autarky price of tomatoes in Mexico was below the world price and in the United States was above the world price. Similarly, the autarky price of poultry in Mexico was above the world price and in the United States was below the world price. Draw diagrams with domestic supply and demand curves for each country and each of the two goods. As a result of NAFTA, the United States now imports tomatoes from Mexico and the United States now exports poultry to Mexico. How would you expect the following groups to be affected?
a. Mexican and U.S. consumers of tomatoes. Illustrate the effect on consumer surplus in your diagram.
b. Mexican and U.S. producers of tomatoes. Illustrate the effect on producer surplus in your diagram.
c. Mexican and U.S. tomato workers.
d. Mexican and U.S. consumers of poultry. Illustrate the effect on consumer surplus in your diagram.
e. Mexican and U.S. producers of poultry. Illustrate the effect on producer surplus in your diagram.
f. Mexican and U.S. poultry workers.

Key Concepts

Distributional Effects and Economic Winners/Losers

The distributional effects of trade refer to how the gains and losses from trade are spread across different groups within an economy, such as consumers, producers, and workers. While overall economic efficiency improves with trade, certain groups may experience adverse impacts. For instance, in industries facing increased competition from imports, workers and producers may suffer due to lower prices and reduced output, while industries benefiting from exports may see increased income and employment. Understanding these effects helps in designing appropriate adjustment policies.

Producer Surplus

Producer surplus represents the difference between the amount producers are willing to accept for a good and the higher price they actually receive in the market. Graphically, it is the area above the supply curve and below the market price. When trade changes domestic prices, producer surplus can either increase or decrease depending on whether the country is exporting (facing higher prices) or importing (facing lower prices), thereby affecting the income of domestic producers.

Consumer Surplus

Consumer surplus is the measure of the benefit that consumers receive when they are able to purchase a product at a price lower than the maximum they are willing to pay. It is represented graphically as the area under the demand curve and above the market price. Trade can affect consumer surplus by altering domestic prices—typically, lower prices from imports increase consumer surplus in the importing country, while higher prices in the exporting country can reduce consumer surplus.

Autarky Price versus World Price

The autarky price is the domestic price of a good in the absence of trade, determined solely by local supply and demand conditions, whereas the world price is set in the global market. When the autarky price is different from the world price, it creates an incentive for trade, as countries will either import the good if the world price is lower, or export it if the world price is higher. This concept is central to understanding the initial gains from trade and subsequent effects on market equilibrium.

Comparative Advantage

Comparative advantage is the principle that a country should produce and export goods for which it has a lower opportunity cost relative to other countries. This concept explains why countries engage in trade even when one country may be absolutely more efficient in producing all goods. It underpins the idea that trade allows all countries to consume beyond their autarky production possibilities, leading to overall welfare gains.

Domestic Supply and Demand Analysis

Supply and demand analysis is used to determine the equilibrium price and quantity in a market. When trade is introduced, the domestic price converges towards the world price, leading to adjustments in the quantity supplied and demanded. Diagrams that represent domestic supply and demand curves help visualize these changes and illustrate how trade policies, such as tariff reductions, shift market outcomes.

Transcript

00:02 Before nafta was passed to eliminate tariffs on goods, the price of tomatoes was low in mexico below the world price.

00:15 And the world price of tomatoes in the u .s.

00:20 Was above the world price.

00:21 And the two graphs that show that, or the top two graphs show the u .s.

00:29 Market on the left and the market in mexico on the right and it's also true that in the u .s.

00:36 Poultry prices were below the world price while they were above the world price in mexico and the two graphs show the market for the domestic demand and supply of both products and so when nafta was passed it eliminated tariffs and opened up trade between the u .s.

01:01 And mexico and we wanted to know for the mexican and u .s.

01:08 Consumers of tomatoes what happened to consumer surplus when free trade occurred.

01:14 So starting in the u .s., the u .s., what price was, the price that was being paid for tomatoes in the u .s.

01:25 Was higher than the world price.

01:27 So when the price went down in the u .s., consumer surplus increased, by a plus b because us consumers were now getting more tomatoes qc at a lower price.

01:49 In mexico, though, the opposite happened.

01:52 The price went up in mexico.

01:54 And so in mexico, we got a decrease in consumer surplus w plus x because the mexican consumer consumers were paying a higher price, the world price, then they paid originally before trade.

02:19 Then what happened to the producer surplus in both countries for the tomato producers? well, in the u .s., the producer surplus decreased by the area a.

02:33 So we had a decrease in producer surplus equal to a in the u .s.

02:40 Because now the domestic producers, instead of producing the quantity u .s., there at the original domestic equilibrium, they're only producing qh, and so their producer surplus has decreased by the area a.

03:01 In mexico, though, they're producing more.

03:05 So producer surplus in mexico increased by w plus x.

03:11 So we've got an increase in producer surplus in m for mexico equal to w plus x...

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