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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.
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As the Chinese clothing industry expands and increases exports and begins lowering the world price, it's going to have very similar but slightly different effects for an importing or exporting country. So for an important country like, say, the United States, let's see what happens to consumer surplus producers. Surplus in total surplus. Well, if you imagine that the world price was at the dotted green Line, you would have consumer surplus being everything above that dotted line below the demand curve, including this triangle in here, Right? And then producer surplus would be everything below the dotted line and to the left of the supply curve. Okay, Now, once we actually move down to the solid green line, the new World price the consumer surplus has now expanded to include everything above the solid green line and below. To the left of that is the demand curve. The producer surplus, meanwhile, has shrunk. Okay, so most of what happened there was what was previously produced for sure, plus just became consumer surplus. Right? But there's also been in addition of a new area What is that? Well, it's essentially this right here. That trap is oId if you will right. That is the addition to total surplus. So what's happened to consumer surplus? Well, that's gone up. Producer surplus has gone down, but total surplus has increased. In other words, consumer surplus increased Maur then producer surplus decreased. All right, now, what about an exporting country? All right, So here, let's say again, the world Price was formerly at the dotted green line and it's gonna fall to the solid green line. So let's look at the before and after for the before. If it's at the dotted green line, you're looking at a consumer surplus in this small triangle. You know what? Let's go back to black just for consistency. You're looking at a consumer. Sure. Plus that small triangle there it's everything above the dotted line to the left of the demand. Kurt and the producer Surplus, on the other hand, is gonna be much bigger. In fact, it's going to be this entire triangle here. All right, now, what happens when the world price drops? Because of this expansion of the Chinese export market? Let's take a look at that. The new producer surplus is going to be bounded by the solid green line so that has shrunk dramatically. Okay, that triangle has become significantly smaller. The consumer surplus, on the other hand, has grown and is now this triangle. All right, so consumer surplus again has gone up. Producer surplus again has gone down. Now, the question is, what has happened to the total surplus? Well, where's before? We had that trap. Is oId shape that increased? Now we have a trapezoid shape that has decreased here. Producer surplus has fallen so much faster than consumer surplus that the total shirt plus has gone down. So that would be the difference between an importing and exporting countries. So the importing country, the importing country would be very happy that they're able to buy so much more clothing at cheaper prices. But the exporting country is in the exact opposite situation.
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