When a country chooses to import goods, the economic players face wins and losses. Before trade, prices are set at the equilibrium of supply and demand.
Note. From Principles of Economics by Mankiw, 2024, Cengage Learning.
In the image above we can see that the consumer surplus before trade is represented by area A or the area above the equilibrium price before trade. Producer surplus in this closed economy is represented by areas B and C, and the total surplus for this closed economy is represented by A + B + C.
Imports and Surplus
- World price: When a country opens up to imports, domestic goods must be priced at the world market price to compete with imported goods.
- Lower price: In this scenario, the world price is lower than the domestic price before trade.
- Domestic demand increases: Consumers purchase more because of the lower price.
- Domestic supply decreases: Producers supply less because the lower price reduces potential profits.
- Imports: The difference between domestic quantity demanded and quantity supplied represents imports.
- Consumer surplus increases: Consumer surplus increases by Areas B and D.
- Producer surplus decreases: Producer surplus decreases by Area B.
- Area B: This area is above the new world price and becomes part of consumer surplus after trade begins.
- Area D: This area represents imports and also contributes to the new consumer surplus.
- New consumer surplus: Consumer surplus is represented by Areas A + B + D.
- Total surplus increases: Total surplus is represented by Areas A + B + C + D.
- Overall effect: Opening the country to imports increases total surplus, with the gain represented by the additional imports.
In summary, for an importing country:
- The domestic price lowers to the world price.
- Producers lose (lower price, less production ® lose area B).
- Consumers gain more than producers lose (gain B and D).
- The economy as a whole is better off by area D – the gains from trade.
Mankiw, N. G. (2024). Principles of Economics. Cengage Learning.
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