Exporting and Importing - Online Tutor, Practice Problems & Exam Prep

When a country opens to international trade, it can experience changes in consumer and producer surplus. In an exporting scenario, a higher world price increases producer surplus while decreasing consumer surplus, leading to a net gain for the economy. Conversely, in an importing scenario, a lower world price boosts consumer surplus but reduces producer surplus, also resulting in a net gain. Thus, trade can enhance overall economic welfare, demonstrating the benefits of comparative advantage and the importance of understanding market dynamics in an open economy.

Autarky

Hey guys, now we're going to return to the topic of trade. Let's see what happens in a domestic market when a country opens up to international trade, right? We had people, and we saw how they could reach points outside of their production points by trading, right? And we saw that they were going to produce and trade goods where they had a comparative advantage, right? The comparative advantage, remember, was that they had a lower opportunity cost for producing that good compared to the other country or the other person. If you don't remember much about it, we're not going to dive so much into comparative advantage here, but it is what drives these international trades to happen. So if you want more information again about comparative advantage or want to refresh, you could probably just type it into the search bar and get a little refresher there on comparative advantage, but again, we're not going to deal with it so much here as it's just, you know, the driving force of these trades. Cool? So let's go ahead and start with this situation. This funny word, autarky, and this is when a country does not trade, okay?

Before we get to the trading, let's just kind of see our baseline where we start from. When a country is not trading with other countries, it's called autarky. We've got this funny word, and in this chapter, we're going to be focusing a lot on what happens to consumer surplus, producer surplus, right? All these kinds of things that we've been seeing in different situations, now we'll see it in the situation of trade. Here we've got a graph, kind of something we're used to, except now you can see I've called it domestic supply and domestic demand. This is only for our country. So we could think only in the US, this is the supply of the product and this is the demand for the product in the U.S., right? And like we've seen, we would reach some sort of equilibrium here, right? And we would have this q_star right here and this p_star. We've seen all this before, where our consumer surplus was everything above the price but below the demand curve. Our producer surplus was everything below the price and above the supply curve. This is all stuff we've seen before, so now we're going to see what happens to these surpluses when we open up to international trade.

In this situation in autarky, we are dealing with this domestic price. The domestic price is the price inside the country when there's no international trading. It's just that country's price, based on their supply and demand. Now when we go into the international trading examples, we're going to be talking about this world price. And this is the price on the worldwide market. And we're going to use this acronym WP for the world price. Just a couple notes before we move down to our first example for international trade, is that the international trading is going to happen at the world price. So the domestic price isn't really going to matter anymore. What we're going to use that price for is to compare to the world price. Is the domestic price higher or lower than the world price, okay? So that's how we use the domestic price, but our focus is going to be on the world price. And one more thing is that the quantities that we're going to be talking about will always be domestic quantities. So we're only going to be talking about the quantity supplied domestically, the quantity demanded domestically. So that's kind of how we're going to follow-up here.

Alright? So let's go on to our first example, down below and let's start that in the next video. Alright? Let's do that now.

High World Price:Export

Alright. Let's try the first situation. Here we're going to see where the world price is higher than the domestic price. Okay? So let's see what happens when we have a high world price. Here we've got the same kind of graph we had above, except now this red line is going to indicate the world price, right? So if we look here, this was our original quantity, right, and our original price when we were in autarky, right, when there was no trade allowed internationally. So here we still have our domestic supply and our domestic demand, right. So we're going to be focusing on this domestic market in this situation where they're trading internationally, right? So if we had this price and quantity and now we opened up to international trade and we found out that in this market, the world price was something higher than our equilibrium price in the country, right? So remember now that we have this high world price and we are trading internationally, this world price is the price that's going to prevail on the market. Okay, so let's go ahead and see what happens at this price, right? We've seen what happens with high prices before, right? So it's kind of going to follow in that same suit here, so let's see what happens. This first spot right here where the world price touches the demand curve, right, that's going to be the quantity demanded, once we open up to international trade and remember that's the domestic quantity demanded, so the people the consumers in our country demand this much quantity at the higher price, right? And we would expect that. We would expect the quantity demanded to go down because the price went up, right? So what do you think happened to quantity supplied? If the price goes up, we would expect quantity supplied to increase too, right? Because supply increases with price. So let's go ahead and see that, and that's going to be this dot right here right where the world price touches the supply curve. We're going to get the quantity supplied in this example. So we've seen this before right where the price was higher than equilibrium and in this case just like we see here, the quantity supplied is greater than the quantity demanded, right? So before we would see this and we would think that it was a surplus, right. We would see this surplus and we talked about it being all these inefficiencies, right. We were putting too many resources into this market, we needed to be at equilibrium, but now let's see what happens when we have international trade. This surplus can be sold in other countries, right? We have these extra units, now the people in our country don't want to buy them, but there are people in other countries that are willing to pay this world price, for this surplus, right? For these extra units extra units that we're not gonna be able to sell here. So what ends up happening is that that same surplus, that distance between here and here, that ends up being exported. These become exports, right? So exports, we've got our definition here on the right. First here, domestic quantity surplus, so whenever we have this surplus right in the domestic market, we can turn those into exports if we're trading internationally. Right? So these exports, they're goods that are produced domestically here at home but sold overseas, right? Sold in another market, in some other market. Cool? So that's kind of what we're going to be dealing with here and now what we want to do is be able to analyze what's happened to our surplus, our consumer surplus and our producer surplus in this situation, right? What has this done to our surpluses? So I'm going to label the graph, in all these different little sections. So I'll call this section up here A, this section right here B, C, and then we'll have, D right here, E and F. Cool? Alright. So let's go ahead and say which section goes where. So before we started trading internationally, we were in that situation of autarky, right, and we could see that our consumer surplus before, right? It was at our equilibrium price, so our original surplus was this triangle, right? And I'm going to ask you not to shade stuff in yet because I'd rather you shade it in, once we get to the once we do start trading, right? I'm just showing you the before situation and then I'm going to erase this. This. So that was the consumer surplus that we were used to, right. Everything above the equilibrium price and under the demand curve, right? So that was just section A plus B plus C. That was our consumer surplus and we saw that our producer surplus was everything below the price but above the supply curve, right? So it was that triangle kind of like we're used to. That standard case here and that's just E plus F, right? So in this situation our total surplus was that A plus B+C+F. Right? So all those sections are part of our surplus. I'm going to go ahead and erase this now and then we're going to reshade for our after trading, right? So now we've opened up trade, the world price is higher, right? So we've got this situation where we're going to be exporting goods. So what's going to happen here to our consumer /_surplus? So remember Consumer Surplus is everything above price and below the demand curve. In this case, the price is the world price_right? So what's gonna be that section? It's gonna be everything above the world price and below the demand curve right? So it's gonna be this little triangle right here. It's just A now and that makes sense right because the price went up, we would expect consumer surplus to decrease and that's exactly what's happened here. We see that consumer surplus_is just A now. So here what's happened is we've lost B plus C from consumer surplus,right? They've lost those sections of the surplus, but let's see what's happened to producer_surplus. Now producer surplus is gonna be everything below the price, but above the supply curve, right? So in this case, we've got below the price is gonna be all of this, but look how much it extends now. It's gonna go all_the_way out here, right? Because that's all_below the_price and we did produce all those_units, right? We've produced all the units all the way including that area of D. So we see that the producer surplus_has increased_here right? So producer surplus on_top of being E plus F is now B plus C plus D plus E plus F, right? So producer surplus has increased significantly_here_right? They took some of that surplus from the consumers from the higher price, but they also added a little extra_surplus there in section D. So_you'll see_that producer surplus has gone up B plus C plus D right? So they_got_even a little more than what the consumers lost here, right? So here's our grand finale of our exporting situation is that now our surplus includes D, right? Our total surplus_has increased for this economy. So plus D, right? So something_that was not surplus before we started trading, we now_have that_as surplus and remember when we were_talking about trading in the comparative advantage in the right, we saw that we were able to reach points outside of our because of these gain_from trade and this is exactly what we're seeing here in the international trading_example_is_that our surplus_has increased past the point we could have done it just with our domestic demand and_supply. Cool? So our surplus is_even higher_here in the situation of international trade. Let_me get out of the way so we can fill in these little_conclusions_here at the bottom. So we've got this that in exporting, exporting is gonna_make a_country_producers better off, right? And that's what we see here that the producer surplus has increased significantly and the consumer_surplus has decreased, right? The consumers are worse off, right? So there's always gonna be winners and losers here, but what we see in this situation is_THAT the_gains to the_producers are bigger_than the_losses to the_consumers, right? So in total our nation is gonna be better off as a whole, right? So that's_about it for exports. Why don't we go_on to the_next video, we're gonna_talk about imports And you're gonna see that we're_gonna reach a_lot of the_same conclusions, but it's kinda_goto be backwards. So let's go_ahead_and_do_that in the next_video.

Low World Price:Import

Alright, now let's see a situation where we'll be importing. So let's see what happens when the world price is less than the domestic price. We're going to have a low world price now here. Okay. So let's go straight to the graph, and we'll see that we've got our domestic demand here and domestic supply, right? This graph still represents our domestic market, but now the difference is that we've got this world price, right? So this was our original equilibrium here. P^* \text{ and } Q^*, right? Our quantity axis and our price axis but now we open up to international trade, and we find out that in this market the world price is lower than the price when we didn't trade, right? So now that we're at this lower world price, what's going to happen? Who's going to be happy? Who's going to be sad about this price, right? Let's think about the consumers. The price went down, consumers are happy, right? They're going to demand more and that's what we see happening here. It's going to cross the demand curve way out here, right? So we're going to see that the quantity demanded has increased from our original equilibrium and our quantity supplied, as we would expect, has decreased, right? So up to this point, we would see that this low price would have caused a shortage, right? We've got this shortage between the quantity demanded and the quantity supplied. Right? But now that we've opened up to international trade, this shortage can be filled in by producers outside the US, right? So we could find producers in other countries that want to send their product to us, and we'll buy it here in the US. So we're going to have this situation where we're importing. Right? So when we have a domestic quantity shortage here on the right, that's when we're going to import. Right? So imports are going to be goods that are produced overseas but sold domestically right? So we don't produce them here, but they do get sold inside our country. Cool? So let's go ahead and see what happens here. Oh, and just to reiterate, this distance between these two, right, from the quantity supplied domestically to the quantity demanded, this is going to be the amount of the imports, right? The amount of that shortage is going to be the amount that we want to import. Cool? So let's go ahead and analyze consumer surplus and producer surplus in this situation. So we're going to have a b, c, d, and e here. Cool? So just like before we had our original consumer and producer surplus that we're used to right? We had this section for our whoops, for our consumer surplus right above the price but below the demand curve, and this was a section for our producer surplus before we started trading, right? This is something we're used to, and we'll see that the consumer surplus was just A and the producer surplus was this B plus E, right? So our total surplus in this situation was A plus B+E. Cool? Alright so now I'm going to erase this, and let's reshade this based on the international trade, right? What's going to happen after we start trading? Well, let's first talk about consumer surplus, right? What's going to happen to consumer surplus? It's going to be everything above the price, but below the demand curve, and just like we saw with the exports right here with the imports, we're going to increase our surplus quite a bit here. Right? The surplus is going to go all the way out here to where the demand curve touches the price, and we're going to get this big triangle, right? So, in this case, when we're importing, the consumers are pretty happy about it, right? Because we got this low price, They're able to get more of this product at this lower price. So the consumers are pretty happy, and we're going to see that the consumer surplus went up to a plus b plus c+d, right? So they've gotten this extra area into their surplus. Part of it came from the producers, right? The B, but the c+ was nobody's surplus before. So plus b+c+d, right? Their change was a positive change of all those areas. And how about the producers? In this case, it's going to be everything below the price but above the supply curve, right? And that's going to be just this little area of E, right. So they've lost some of their surplus to the consumers, but this is what they have left in E. Cool. So they lost B, right. So what's happened to our total surplus here, it now includes all of this area, right. So we've got A plus B plus c plus d plus e. Right? So it's gained this section C plus D, and you'll see that this is very similar to our conclusion in exports right? Now here, I'm going to scroll up back to exports real quick just so you don't get confused because in exports we got this just plus D section, but what happened is when I did the imports I kind of split that D into 2 sections so it got a C plus D. In the end, what happened is we got this extra area right? So in both cases what we see is that the gains from trade right, have exceeded the losses to the person who lost some of their surplus. So in both cases, the nation ends up being better off, right? This is just going to be the opposite of what happened with exports of who's better off and who's worse off. So let's make those conclusions now. So we see that importing has made a country's consumers better off, right? They love the lower price and the quantity that they can get at that lower price, and the producers are worse off, right? They've lost some of their surplus. The price is lower. They're not producing as much as they were. But we see that the nation is better off because the gains to the consumers exceed the losses to the producers, right? So you can see this is kind of the opposite that happened above with the exports, but in both cases, we see that the nation ends up being better off as a whole. Cool? So let's go ahead and do a practice problem and then we'll move on, alright? Let's do that now.

A nation practicing autarky has a domestic price of extremely tight pants that is lower than the world price. If the nation opened up trade,

• A. It would become an extremely tight pants exporter because the nation has a comparative advantage in producing extremely tight pants.
• B. t would become an extremely tight pants importer because the nation has a comparative advantage in producing extremely tight pants.
• C. It would become an extremely tight pants exporter because the nation does not have a comparative advantage in producing extremely tight pants.
• D. It would become an extremely tight pants importer because the nation does not have a comparative advantage in producing extremely tight pants.

Here’s what students ask on this topic:

What is the difference between consumer surplus and producer surplus in the context of international trade?

Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. In the context of international trade, when a country imports goods at a lower world price, consumer surplus increases because consumers pay less for the same goods. Producer surplus, on the other hand, is the difference between what producers are willing to accept for a good and what they actually receive. When a country exports goods at a higher world price, producer surplus increases because producers receive more for their goods. Both surpluses are affected by the world price, leading to changes in economic welfare.

How does comparative advantage drive international trade?

Comparative advantage is the ability of a country to produce a good at a lower opportunity cost than another country. This concept drives international trade because it allows countries to specialize in the production of goods where they have a comparative advantage, leading to more efficient global production. By trading, countries can obtain goods at a lower cost than if they produced them domestically, thus increasing overall economic welfare. Comparative advantage explains why countries benefit from trade even if one country is more efficient in producing all goods.

What happens to domestic prices when a country opens up to international trade?

When a country opens up to international trade, domestic prices adjust to align with world prices. If the world price is higher than the domestic price, the domestic price will rise, benefiting producers but harming consumers. Conversely, if the world price is lower than the domestic price, the domestic price will fall, benefiting consumers but harming producers. These price adjustments reflect the new equilibrium established by the interaction of domestic supply and demand with global markets, leading to changes in consumer and producer surplus.

What are the economic effects of exporting on a country's welfare?

Exporting affects a country's welfare by increasing producer surplus while decreasing consumer surplus. When a country exports goods at a higher world price, producers receive more for their goods, leading to an increase in producer surplus. However, consumers face higher prices, reducing consumer surplus. Despite this, the overall economic welfare of the country improves because the gains to producers exceed the losses to consumers. This net gain demonstrates the benefits of trade and the importance of comparative advantage in enhancing economic welfare.

How do imports impact consumer and producer surplus in a domestic market?

Imports impact consumer and producer surplus by lowering the domestic price of goods. When a country imports goods at a lower world price, consumer surplus increases because consumers can purchase goods at a lower price. However, producer surplus decreases because domestic producers receive less for their goods. Despite the reduction in producer surplus, the overall economic welfare of the country improves because the gains to consumers exceed the losses to producers. This net gain highlights the benefits of trade and the role of comparative advantage in improving economic welfare.