Page 20 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes good, perhaps carrots. However, should the price she receives for her turnips be greater than her
supply price, then she comes out ahead. She receives more than the cost of production incurred, what
is termed producer surplus. She gains from this trade.
Putting Horst and Francine together is bound to be beneficial for both. If Horst pays less than his
demand price, then he gains from the trade. If Francine receives more than her supply price, then she
also gains from this trade. It is a win-win exchange.
In the extreme case, it is possible that the price Horst pays is exactly his demand price or the price
Francine receives is exactly her supply price. In this case, one side or the other does not gain from the
trade, but neither does that side lose.
However, should the price rise above the maximum demand price Horst is willing to pay or fall
below the minimum supply price Francine is willing to pay, then the exchange will not occur. One
side or the other will opt out of the trade.
The end result of such voluntary trades between buyers like Horst and sellers like Francine is that
one side or the other, and usually both, gain from the trade. If they did not gain (or at least break
even), then they would not voluntarily engage in the exchange.
Graphical Gains
The gains obtained from market exchanges can be illustrated using the exhibit to the right. This
exhibit presents a standard market graph. The negatively-sloped demand curve, D, represents the
demand price that buyers (like Horst) are willing and able to pay to purchase different quantities of
turnips. The positively-sloped supply curve, S, represents the supply price that sellers (like Francine)
are willing and able to accept to sell different quantities of turnips.
If this is a competitive market, free of other market failures and other annoying complications, then
the intersection of the demand and supply curves gives rise to the equilibrium price and equilibrium
quantity. The relation between the market equilibrium price, the demand price on the demand curve,
and the supply on the supply curve indicates the gains from trade.
The area above the equilibrium price and below the demand curve is the consumer surplus generated
by this market. The area below the equilibrium price and above the supply curve is the producer
surplus generated by this market.
The combination of these two areas, the area above the supply curve and below the demand curve, is
the gains from trade generated by this market. This is extra satisfaction, welfare, profit, etc. that
would not exist if this market exchange did not take place.
Gaining from International Trades
The only difference between regular market trades, such 6
as that between Horst and Francine, and international Price
trades is the location of the buyers and sellers. If Horst 5 S
lives in one nation, such as the hypothetical Republic of
Northwest Queoldiola, and Francine lives in another, such
as the equally hypothetical United Provinces of Csonda, 4
then the previous market exchange example is also an
international trade. But the gains from trade still result. 3
As a matter of fact, Horst does live in the Republic of
Northwest Queoldiola and like other Queoldiolan's, he 2
loves his turnip lasagna. And Francine is a turnip-growing
citizen of the United Provinces of Csonda, and she is eager
to sell her product to buyers from other lands. 1 D
Horst and Francine gain from this turnip exchange, but so
too do their home nations. Northwest Queoldiola ends up
with a bit more consumer surplus, thanks to that obtained 0 1 2 3 4 5 6 7 8 9 10
by Horst, and the Csonda ends up with bit more producer Quantity
surplus, thanks to that obtained by Francine. Figure 2.1

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