September, 2015 | The Economics Classroom

The Gains from International Trade in a Demand and Supply Diagram

International trade results in an increase in efficiency and total welfare among consumers and producer in the countries that participate in it. This is a thesis presented by advocates of free trade all the time. This lesson provides a simple illustration of the gains from trade experienced by an exporting and an importing nation, showing the increases in consumer and producer surplus and total welfare resulting from specialization based on comparative advantage.

The Gains from International Trade in the PPC Model

Now that we’ve established the difference between absolute and comparative advantage, we can proceed to how countries stand to gain from trade when they specialize in and produce the goods for which they have a comparative advantage. In this lesson we will explain how a “real exchange rate” can be determined between two goods and two countries that is mutually beneficial for both countries and then show how trade can increase the total possible level of consumption and effectively shift the PPC curve outwards.

Determining Absolute and Comparative Advantage

Why do nations stand to gain from trading with one another, and how should a nation determine the goods it should specialize in and which it should import? To answer these questions we must introduce some basic concepts of International Trade: absolute and comparative advantage. This lesson introduces these two concepts and uses a simple PPC model to determine how two countries should allocate their resources towards the production of a particular good to maximize the benefit they derive from trading with one another.

In the next lesson we’ll learn how to illustrate the potential gains from trade in the PPC diagram.

Calculating the area of Deadweight Loss welfare loss in a Linear Demand and Supply model

Once you’ve learned how to calculate the areas of consumer and producer surplus on a graph when the market is in equilibrium, the next question is how so we determine the loss of total welfare when a market is out of equilibrium. This lesson shows how to find the changes in CS and PS when the price is not at the free market equilibrium and thereby determine how much welfare loss arises from a disequilibrium.

Consumer Surplus and Producer Surplus

The additional benefits enjoyed by consumers pay less than they are willing to pay and by producers who sell for a price higher than they are willing to sell for are known as consumer and producer surplus. Together they make up the “total welfare” of a market. This lesson introduces and explains these concepts, important for understanding what makes the market system effective at meeting society’s wants and needs.

 

Why does Supply slope upwards? (The law of increasing opportunity cost and supply)

In a previous lesson we introduced the law of supply and the determinants of supply, but we never clearly explained WHY there is a direct relationship between price and quantity supplied. In this lesson we will connect the law of supply to a law introduced in an earlier lesson on the PPC and the Law of Increasing Opportunity Costs.

The concept of increasing marginal costs of production will be explained and the link between firms’ marginal costs and supply will be established in this lesson.

Budget Deficits, National Debt and Interest Rates

A previous video lesson (Introduction to Bond Markets and Interest Rate Determination), it was explained that under some circumstances, persistent government budget deficits and growing national debt can drive up interest rates as investors’ demand for the nation’s bonds decreases while supply increases, driving up the government’s borrowing costs.

In this lesson we will examine the circumstances under which this “crowding-out effect” will NOT occur, by looking at data on budgets balances, interest rates and savings rates for the United States between 2000 and 2011.

 

Introduction to Bond Markets and Interest Rate Determination

One of the least understood topics among introductory Econ students is how bond markets work. This video lesson introduces the bond market, and explains how the demand for a government’s debt is an important determination of the borrowing costs faced by that government. We will answer some important questions about bond markets, such as, “What’s the relationship between bond prices and bond yields?” and “How could budget deficits and debt affect interest rates?”

In the next video we’ll examine circumstances under which large budget deficits and national debt may NOT drive up a government’s borrowing costs.


The Relationships between Budget Deficits, Surplus and National Debt

In this lesson we distinguish between the different situations a government’s budget may be in and explain how the level of national debt is determined by past years’ budget balances.

We will examine several case studies within Europe and outline the circumstances under which government debt is considered to be a burden and when it is not, according to the terms outline in the European Union’s Stability and Growth Pact