The nation of Textilia does not allow imports of clothing....

The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs 820 dollar and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith's The Wealth of Nations while on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of 16 dollar The number of Tshirts consumed in Textilia rises to 4 million, while the number of T-shirts produced declines to 1 million. a. Illustrate the situation just described in a graph. Your graph should show all the numbers. b. Calculate the change in consumer surplus, producer surplus, and total surplus that results from opening up trade. (Hint: Recall that the area of a triangle is $1 / 2 \times$ base $\times$ height.)

The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs 820 dollar and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith's The Wealth of Nations while on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of 16 dollar The number of Tshirts consumed in Textilia rises to 4 million, while the number of T-shirts produced declines to 1 million.
a. Illustrate the situation just described in a graph. Your graph should show all the numbers.
b. Calculate the change in consumer surplus, producer surplus, and total surplus that results from opening up trade. (Hint: Recall that the area of a triangle is $1 / 2 \times$ base $\times$ height.)

Key Concepts

Economic Equilibrium

Economic equilibrium is the point at which the quantity demanded by consumers equals the quantity supplied by producers, and the market clears at that price without any shortage or surplus. In a no-trade scenario, domestic supply and demand determine the equilibrium price and quantity, which then shift when external factors such as international trade are introduced.

International Trade

International trade involves the exchange of goods and services across national borders, leading to a new market equilibrium when domestic policies are adjusted to allow imports or exports. Opening up the market to trade affects domestic prices by aligning them with world prices, altering production and consumption levels, and therefore reshaping domestic economic welfare.

Consumer Surplus

Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It is graphically represented by the area under the demand curve and above the market price. When international trade lowers the domestic price, consumer surplus typically increases because consumers are able to purchase more goods at a lower price.

Producer Surplus

Producer surplus is the difference between what producers receive for a good and the minimum price at which they are willing to supply it. Graphically, it is the area above the supply curve and below the market price. With the introduction of international trade and a subsequent drop in domestic prices, producer surplus usually decreases because producers receive less for each unit sold and may produce fewer units.

Total Surplus

Total surplus is the sum of consumer surplus and producer surplus, representing the overall net benefit to society. When market conditions change, such as through the introduction of international trade, shifts in consumer and producer surplus can lead to a change in the total surplus. Analyzing these changes helps in understanding the aggregate gains or losses resulting from policy shifts.

Transcript

00:01 Okay, question five is saying that the nation of textilia does not allow imports of clothing.

00:09 So in equilibrium without trade, we can see that now the equilibrium price is 20, and equilibrium quantity is 3 million t -shirts.

00:22 Okay, so i will 3 here.

00:25 And now the president decides to open the market to international trade.

00:31 So now the price of the t -shirt falls to 16.

00:41 So we can see that the international price is lower than the domestic price.

00:50 And when the market price of t -shirt falls to $16, the number of t -shirt consumed raised to 4 million.

00:59 So the number of t -shirt consumed is the demand for t -shirt rises to 4 million.

01:10 So this point is 4.

01:14 And the number of t -shirts produce t -coins to 1 million.

01:22 So the supply of domestic t -shirt is 1 million.

01:27 So it's this point.

01:28 Okay, so after we draw this graph, we can easily calculate the consumer surplus and produce a surplus from this graph.

01:39 So i'll use color blue as the consumer surplus.

01:45 So before the trade, the consumer surplus is the blue triangle here, which is the area here.

02:01 But then, now after the trade, the consumer can buy more t -shirts with a lower price.

02:08 So the triangle becomes larger.

02:11 So the difference of this small triangle and this big triangle here is the shaded area in blue here...

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