The world price of wine is below the price that would prevail in India in the absence of trade.

a Assuming that Indian imports of wine are a small part of total world wine production, draw a graph for the Indian market for wine under free trade. Identify consumer surplus, producer surplus and total surplus in an appropriate table.

b Australia is a major wine exporter. Suppose that a virulent disease destroys much of the grape harvest in Australia. What effect does this shock have on the world price of wine?

Using your graph and table from part (a), show the effect on consumer surplus, producer surplus and total surplus in India. Who are the winners and losers? Is India as a whole better or worse off?