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Welfare effects of free trade in an exporting country
The following problem analyzes the Ukrainian market for pumpkins. The graph below shows the domestic supply and demand curves for pumpkins in Ukraine. Assume that Ukraine’s government does not currently permit international trade in pumpkins.
Use the black point (plus symbol) to denote the equilibrium price of one ton of pumpkins and the equilibrium quantity of pumpkins in Ukraine without international trade. Next, use the green triangle (triangle symbol) to shade in the area that represents consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade in the area that represents producer surplus in equilibrium.
Based on the information from the previous graph, absent international trade total surplus is \( \square \).
The following graph shows the same domestic supply and demand curves for pumpkins in Ukraine. Now, suppose that the Ukrainian government changes its stance on international trade, deciding to allow free trade in pumpkins. The horizontal black line \(\left(P_{W}\right)\) represents the world price of pumpkins at \(\$ 1,000\) per ton. Assume that Ukraine’s entry into the world market for pumpkins has no effect on the world price and there are no transportation or transaction costs associated with international trade in pumpkins. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.
Use the green triangle (triangle symbol) to shade in the area representing consumer surplus, and then use the purple triangle (diamond symbol) to shade in the area representing producer surplus.
When Ukraine adjusts its trade policy to allow free trade of pumpkins, the price of one ton of pumpkins in Ukraine becomes \(\$ 1,000\). At this price, tons of pumpkins will be demanded in Ukraine, and tons will be supplied by domestic suppliers. Therefore, Ukraine will export tons of pumpkins.
Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade.
With Free Trade
(Dollars)
Without Free Trade
(Dollars)
Consumer Surplus
\( \square \)
\( \square \)
Producer Surplus
\( \square \)
\( \square \)
When Ukraine allows free trade, the country’s producer surplus – by |, and consumer surplus by . Therefore, the net effect of allowing international trade on Ukraine’s total surplus is a of