1. Welfare effects of free trade in an exporting country Consider the Zambian market for soybeans The following graph shows the domestic demand and domestic supply curves for soybeans in Zambia. Suppose Zambia's government currently does not allow international trade in soybeans Use the black point (plus symbol) to indicate the equilibrium price of a ton of soybeans and the equilibrium quantity of soybeans in Zambia 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 380 Domestic Demand Domestic Supply 365 Equilibrium without Trade 350 335 320 Consumer Surplus 2 305 290 Producer Surplus a 275 260 245 230 0 25 50 75 100 125 150 175 200 225 250 QUANTITY (Tons of soybeans) Based on the previous graph, total surplus in the absence of international trade is$ The following graph shows the same domestic demand and supply curves for soybeans in Zambia. Suppose that the Zambian government changes its international trade policy to allow free trade in soybeans. The horizontal black line (Pw) represents the world price of soybeans at $350 per ton Assume that Zambia's entry into the world market for soybeans has no effect on the world price and there are no transportation or transaction costs associated with international trade in soybeans. 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 consumer surplus, and then use the purple triangle (diamond symbol) to shade producer surplus. 380Domestic Demand Domestic Supply 365 Consumer Surplus 350 335 320 Producer Surplus 305 290 275 260 245 230 0 25 50 75 100125 150 175 200 225 250 QUANTITY (Tons of soybeans) When Zambia allows free trade of soybeans, the price of a ton of soybeans in Zambia will be $350. At this price, tons of soybeans will be demanded in Zambia, and tons will be supplied by domestic suppliers. Therefore, Zambia will export tons of soybeans. 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 Producer Surplus When Zambia allows free trade, the country's consumer surplus by , and producer surplus by . So, the net effect of international trade on Zambia's total surplus is a of $ Grade It Now Save & Continue Continue without saving
