Question

 1. Welfare effects of free trade in an exporting country

 Consider the Sudanese market for tangerines.

 The following graph shows the domestic demand and domestic supply curves for tangerines in Sudan. Suppose Sudan's government currently does not allow international trade in tangerines.

 Use the black point (plus symbol) to indicate the equilibrium price of a ton of tangerines and the equilibrium quantity of tangerines in Sudan in the absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium.

Answer 1

Without trade, trade is occurring where demand equals supply at point E. At this point, 150 units are traded and price is $460.

Consumer surplus without trade is sum of area of portion A+B+C whose sum is (1/2) * (150 - 0) * (660 - 460) = 15,000

Producer surplus without trade is sum of area of portion D+O whose sum is (1/2) * (150 - 0) * (460 - 260) = 15,000

Total surplus without trade = Consumer surplus + Producer surplus = 15,000 + 15,000 = 30,000

After trade, price changes to $500,

At $500, quantity demanded is 120 units while quantity supplied is 180 units. Thus exports = Quantity supplied - Quantity demanded = 180 - 120 = 60

Consumer surplus after trade is area of portion A whose sum is (1/2) * (120 - 0) * (660 - 500) = 9,600

Producer surplus after trade is B + C + O + D + F whose sum is (1/2) * (180 - 0) * (500 - 260) = 21,600

Total surplus after trade = 9,600 + 21,600 = 31,200

When Sudan allows free trade, consumer surplus falls by 5,400 and producer surplus rises by 6,600. Net effect of total surplus is 1,200.