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4 . Welfare effects of free trade in an importing country Consider the Guatemalan market for oranges. The following graph shows the domestic demand and domestic supply curves for oranges in Guatemala. Suppose Guatemala's government currently does not allow international trade in oranges. Use the black paint (plus symbol) to indicate the equilibrium price of a tonne of oranges and the equilibrium quantity of oranges in Guatemala in the absence of international trade. Then, use the green point {triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple point (diamond symbol) to shade the area representing producer surplus in equilibrium. Note: Select and drag a fill area point from the palette to the graph. To ll in regions on the graph, merely drop the fill area point on the desired region. 1750 Domestic Demand Domestic Supply -+ 1600 1450 No Trade Equilibrium 130 A PRICE (Dollars per tonne) 1150 Consumer Surplus 1000 850 Producer Surplus 700 550 400 250 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Thousands of tonnes of oranges) Based on the previous graph, total surplus in the absence of international trade is $ million. (Hint: Take note of the units on the axes of the graph.)Based on the previous graph, total surplus in the absence of international trade is million. (Hint: Take note of the units on the axes of the graph.) The following graph shows the same domestic demand and supply curves for oranges in Guatemala presented in the previous graph. Suppose that the Guatemalan government changes its international trade policy to allow free trade in oranges. The horizontal black line (Pw ) represents the world price of oranges at $700 per tonne. Assume that Guatemala's entry into the world market for oranges has no effect on the world price and that there are no transportation or transaction costs associated with international trade in oranges. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. Use the green points {triangle symbols) to shade consumer surplus, and then use the purple points (diamond symbols) to shade producer surplus. (Note: Select and drag shaded regions from the palette to the graph. To resize the shaded regions, select one of the points and move it to the desired position.) 1750 Domestic Demand Domestic Supply T 1600 - Consumer Surplus 8-0 Producer Surplus 1450 - 1300 - 1150 1000- 850 700 PRICE (Dollars per tonne) World Price 550 400 250 0 4o 80 120 150 200 240 230 320 350 400 QUANTITY (Thousands of tonnes of oranges) When Guatemala allows free trade in oranges, the price of a tonne of oranges in Guatemala will be $700. At this price, the quantity of oranges demanded by Guatemalan consumers will be :1 tonnes , and the quantity of oranges supplied by domestic producers will be tonnes. Therefore, Guatemala will import tonnes of oranges. Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade. (Hint: Be sure to enter consumer and producer surplus in millions of dollars. Take note of the units on the graph.) Without Free Trade With Free Trade (Millions of dollars) (Millions of dollars ) Consumer Surplus :1 Producer Surplus When Guatemala allows free trade, the country's consumer surplus V by $ million, and producer surplus v by $ million. 50, the net effect of international trade on Guatemala's total surplus is a v of $ million
