Another way that we can analyze how trade affects a country and how countries benefit from trade is to use what we call a partial equilibrium analysis, and for this we're going to be using supply and demand diagrams like I showed you in the very beginning of this section. We are going to draw. Let's let it be steel because we've already talked about steel so now both graphs have to do with steel. And we're going to draw a demand curve for steel and a supply curve for steel in both countries. Okay. We'll start out with this country one. And let's assume, of course, if there's no trade we know that the price would be here. I'm going to call this P_sub_a because that's the autarchy price, price without trade, and this would be the quantity, all right. So let's assume that in steel it turns out that the world price is actually higher than this country's price. I'm going to call this P_sub_w, that's the world price. Okay. The world price for steel is higher than this country's domestic price, and so when this country enters free trade, let's say, it joins the WTO or it signs a trade agreement with one of its neighbors, it says, I could export steel. I produce it cheaply at home, I can get this high price on international markets. I'm going to become an exporting country. Okay. So let's see what happens to that exporting country when they enter global trade. Okay, well, the first thing that's going to happen is. We had before trade a consumer surplus and a producer surplus. I want you to be aware of those. Okay. The consumer surplus, you know, is this area just here and I'm not going to mark it because I don't want to lose it afterwards when we start marking and this is the producer surplus. So you see those two triangles, the total welfare of the country was this area here like we showed on earlier graph. Okay. So the country joins world trade and it begins to produce steel for the global market. Immediately what will happen, if we go up the supply curve, the producers say, at that high price I'm willing to produce more steel than I used to. Okay, so we're going to call this Q_sub_s, this will be the quantity supplied of steel. Okay. They're producing more because the prices higher, it's more attractive. On the other hand, the domestic consumer is going to buy less steel than they used to because its price has gone up, and we know when prices are higher the quantity demanded is less, so the quantity demanded becomes this. You see, and what we find is that the country has a surplus of steel. And of course that surplus is what it exports to the world market. Okay. So the country is now producing more steel than it used to, consuming a little bit less because the price goes up, and it's exporting the surplus to the world market. Now, those of you who are from exporting countries, you know how this feels, how this goes. For example, if you're from a Central American country that exports bananas, what happens is the highest quality of banana that goes to the global market, its price will go up domestically, people are able to consume a little bit less of them, producers produce more of them. Okay, so this is a natural development. What I want you to notice here is what happens to the consumer surplus and the producer surplus as we trade. Okay. Now, we know that the consumer surplus is the area between the demand curve and the going price, but now the going price is this one and not this one. Okay. So the consumer surplus has gotten smaller. It's now this area right here. Okay. Consumers have lost this area that I'm indicating in consumer surplus. The producer surplus is the area above the supply curve up to the going price. And you can see very clearly that the producer surplus has grown. Okay. Instead of being just this area here, the producer surplus now includes all of this area. Okay. So total welfare for the country is consumer surplus, this one, plus producer surplus. You can see the country has a hole, has gained this little triangle in welfare. How has it gained that little triangle, what happened, well, it's something very much like our production possibilities frontiers in the previous analysis. This is the magic of trade. This is being able to take advantage of greater efficiency, which you have, getting a higher price on world markets and bringing that welfare home to your producers. Okay. So you can see what happens in an exporting country. Now let's go on to a different country, let's say, this is now supply and demand of steel, I don't need to make this the same. Okay, it's a different country, different conditions. All right. And we would have this price and this quantity in our autarchy position. Okay. So, and let's say that this country when they go to the world market they find the world price is lower, the world price for steel is lower. So there's our world price. Since the world price is lower we're going to buy it abroad rather than produce it here. We become an importing country. Okay. And let's just quickly see what happens as we join the global market and import steel. Okay. You can see, we know where the producer and consumer surpluses were before, it's this area here. Now we import. Okay. So you can see that producers are now producing less. This is quantity supply. The price is lower. They can't make as much money, they withdraw. Typical of an importing country, we lose part of our steel industry. Consumers however can buy a lot more. Okay. So you can see now, consumers are able to buy more of that good at this low price than before. We will have a shortage and that shortage becomes our imports. Okay, so I'm importing, he's exporting, what happens to our consumer and producer surplus. You can see, we have the same kind of magic. Okay. The producer has lost surplus. Now the producer only has this much. They've lost this. But the consumer now has all of this. Okay, the consumer has the surplus they had before plus all of this. And again you can see we've gained this little magic triangle from using the greater efficiency of the world, from being able to take advantage of the world's greater efficiency, consume the goods that they produce at a lower price, importing them to our country. And of course paying for them with some good that we are able to produce more efficiently.
