2. Welfare Effects of Free Trade in an Importing Country

The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $24, and the equilibrium quantity is 4 million T-shirts. One day, after reading Adam Smith's The Wealth of Nationswhile on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of $16. The number of T-shirts consumed in Textilia rises to 8 million, while the number of T-shirts produced declines to 2 million.

Use the blue line (circle symbol) to graph the domestic demand for T-shirts in Textilia. Then use the orange line (square symbol) to graph the domestic supply of T-shirts in Textilia. Next, use the black point (plus symbol) to indicate the domestic equilibrium price and quantity before trade. Finally, use the grey line (star symbol) to indicate the world price.

Note: Assume the domestic demand and domestic supply curves are linear.

Domestic DemandDomestic SupplyDomestic EquilibriumWorld Price0123456789104036322824201612840Price of T-shirtsQuantity of T-shirts (millions)

Complete the following table by calculating the consumer surplus, producer surplus, and total surplus before and after trade. (Hint: Recall that the area of a triangle is 12baseheight12baseheight.)

	Before Trade	After Trade
(Millions of Dollars)	(Millions of Dollars)
Consumer Surplus
Producer Surplus
Total Surplus		As a result of opening up to trade, consumer surplus , producer surplus , and total surplus .