Hey guys, now we're gonna return to the topic of trade. Let's see what happens in a domestic market when a country opens up to international trading. So we had talked about trade before when we were studying PPS, right? We had two different people and we were we saw how they could reach points outside of their P. P. F. Right, production points outside their PPF 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 um remember what that meant was that they had a lower opportunity cost, right for producing that good compared to the other country or the other person. And if you don't remember so much, we're not gonna 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, I want to refresh, go back to those topics about the PPF, you can 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 much as it's just, you know, the driving force of these trades. Cool. So let's go go ahead and start with this situation. This funny word ought are key. And this is when a country does not trade. Okay, so before we get to the trading, let's just kind of see kind of our baseline where we start from, right? So when a country is not trading with other other countries, it's called a Turkey. we've got this funny word, and in this chapter we're gonna 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, Right? So here we've got a graph kind of something we're used to, Right? Except now, you can see I've called it domestic supply and domestic demand, right? So this is only for our country, right? So we can think only in the US this is the supply of the product and this is the demand for the product in the US, 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, right? And we've seen all this before, right? Where we had our consumer surplus, right? Was everything above the price, but below the demand curve, Right? And we had our consumer sir, excuse me, our producer surplus was everything below the price and above the supply curve. Right? This is all stuff we've seen before. So now we're gonna see what happens to these surpluses when when we open up to international trade. Right? So in this situation in Turkey, we are dealing with this domestic price, right? The domestic price is the price inside the country when there's no no international trading, right? It's just that countries price based on their supply and demand. Now, when we go into the international trading examples, we're gonna be talking about this world price, right? And this is the price on the worldwide market, right? And we're gonna use this acronym WP WP for the World Price. Let me write that again in the middle WP for world price. Right? So just a couple of 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? Right? So the domestic price isn't really gonna matter anymore. What we're gonna use that price for is to compare to the world price, right? 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 gonna be on the world price. And one more thing is that the quantities that we're gonna be talking about will always be domestic quantities. Okay. So we're only going to be talking about the quantity supplied domestically, the quantity demanded domestically. Right. So that that's kind of how we're gonna 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
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Alright, let's try the first situation here, we're gonna see where the world prices 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 awe Turkey, right? When there was no trade allowed internationally. So here we still have our domestic supply and our domestic demand. Right? So we're gonna be focusing on this domestic market um in the 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 gonna follow in that 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 gonna be the quantity demanded um 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 quality supply to increase to right? Because supply increases with price. So let's go ahead and see that. And that's gonna be this dot right here, right? Where the world price touches the supply curve, we're gonna get the quantity supplied um 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 would 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 can 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 that we're not going to 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, Well, 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, their 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 gonna be dealing with here and now, what we wanna 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 gonna label the graph in all these different little sections. So I'll call this section up here, eh this section right here, B. C. And then we'll have um 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, um we were in that situation of all Turkey. Right? And we could see that our consumer surplus before, right? It was at equilibrium price. So our original surplus was this triangle, right? And I'm gonna 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 gonna erase this. So that was the consumer surplus, that we were used to write everything above the equilibrium price and other 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 was that triangle kind of like we're used to that standard case here, and that's just E plus F. All right, So in this situation our total surplus, was that A plus B plus C plus E plus F. Right. So all those sections are part of our surplus. I'm gonna go ahead and erase this now and then we're gonna re shade uh for our after trading, right? So now we've opened up trade the world prices higher. Right? So we've got this situation where we're gonna be exporting goods, so what's gonna 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 um 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 get 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 for this economy. So Plus D. Right, So something that was not surplus before we started training, we now have that as surplus. And remember when we were talking about trading in the in the comparative advantage in the PPS, right? We saw that we were able to reach points outside of our PPF because of these gains 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 surpluses even higher here in the situation of international trade. Let me get out of the way. So we can fill in these little, uh conclusions here at the bottom. So, we've got we've got this that an exporting exporting is gonna make a country's 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 better are bigger than the losses to the consumers. Right? So in total, our nation is better off from the trade. Of course the consumers are a little worse off, but the producers are even better off. Right. So we see that the the gains exceed the losses, so the 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 kind of gonna be backwards. So let's go ahead and do that in the next video.
Low World Price:Import
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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 gonna 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? So this graph still represents our domestic market. Um But now all the differences that we've got this world price, right? So this was our original equilibrium here, P. Star and Q. Star, 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 uh when we didn't trade, right? So now that we're at this lower world price, what's gonna happen? Who's gonna be happy? Who's gonna be sad about this price? Right? Let's think about the consumers. The price went down, The consumers are happy, right? They're gonna demand more. And that's what we see happening here, it's gonna cross the demand curve way out here, Right? So we're gonna 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 U. S. 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 gonna have this situation where we're importing, right? So we have a domestic quantity shortage here on the right, that's where we're gonna import, Right? So inputs import, excuse me, are gonna be goods that are produced overseas but sold domestically, Right? So we don't produce them here, but they do get sold inside of our country. Cool. So let's go ahead and see what happens here. Oh and just just to reiterate this distance between these two, right from from the quantity supplied domestically to the quantity demanded. This is gonna be the amount of the imports, right? The amount of that shortage is gonna be the amount that we want to import. Cool. So let's go ahead and analyze um consumer surplus and producer surplus in this situation. So we're gonna have A. B. C. D. And E. Here. Cool. So just like before we had our original uh consumer and producer surplus that we're used to. Right? We had this section for our whoops for our excuse me, our consumer surplus right above the price but below the demand curve. And this was a section for for our producer surplus before we started training, 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. plus E. Cool. Alright so now I'm gonna erase this and let's re shade this um based on the international trade, right? What's gonna happen after we start trading? Well let's first talk about consumer surplus, right? What's gonna happen to consumer surplus? It's gonna be everything above the price, but below the demand curve. And just like we saw with the exports right here with the imports were gonna increase our surplus quite a bit here, right, the surplus is gonna go all the way out here to where the demand curve touches the price and we're gonna get this big triangle, right? So in this case when we're importing the consumers are pretty happy about it because we've 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 gonna see that the consumer surplus went up to A plus B plus C. Plus 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. Plus D. Was nobody surplus before. So Plus B plus C. Plus D. Right there change was a positive change of all those areas. And how about the producers in this case it's gonna be everything below the price but above the supply curve. Right? And that's gonna 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 and now includes all of this area? Right? So we've got a plus B plus C. Plus D. Plus E. Alright 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 gonna 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 two sections. So it got a C. Plus D. In the end, what happened is we got this extra area, right. Um So in both cases what we see is that the gains from trade right have exceeded the losses to the person who who lost some of their surplus. So in both cases the nation ends up being better off, right, This is just gonna 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 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 uh the price is lower, they're not producing as much as they were. But we see that the nation is better 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. Um, 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,
It would become an extremely tight pants exporter because the nation has a comparative advantage in producing extremely tight pants.
t would become an extremely tight pants importer because the nation has a comparative advantage in producing extremely tight pants.
It would become an extremely tight pants exporter because the nation does not have a comparative advantage in producing extremely tight pants.
It would become an extremely tight pants importer because the nation does not have a comparative advantage in producing extremely tight pants.