Free Trade
Increases Total Surplus
…
First
watch this video Imports, Exports, and Exchange Rates:
https://www.youtube.com/watch?v=geoe-6NBy10
…
The U.S.A.
should unilaterally end all import restrictions.
This might seem
radical but this is a widely held and promoted stance among libertarians
including those at the Cato Institute.
Consumer surplus is the price a person
is willing to pay in excess of what they actually pay.
Producer surplus is the price a
producer sells its product for in excess of the cost of production.
Total surplus = consumer surplus +
producer surplus = total economic gain.
For an economy maximizing total surplus
is the goal, and it doesn’t matter if consumer surplus or producer surplus is
bigger.
…
In Figure 1:
Before country “Hereland” opens up to allow
imports, Product X is only supplied to consumers in Hereland by producers
located in Hereland:
· price of X is $10
· quantity supplied of X is 20 units
· consumer surplus is area A
· producer surplus is areas B + C
Hereland is adhering to a strict “Buy
Hereland” policy, no imports allowed.
…
Economists in Hereland convince the
politicians to begin allowing imports of product X from other country
“Thereland.”
Thereland producers have lower costs
and are able to supply X at price of $6.
When imports are allowed price of X in
Hereland drops from $10 to $6.
Total quantity supplied of X in
Hereland increases to 30 units, 10 supplied by Hereland producers and 20 supplied
by Thereland producers
…
Only the most efficient, lowest cost producers
in Hereland continue to make and supply Product X.
Hereland consumer surplus becomes
areas A + B + D.
Hereland producer surplus becomes area
C.
Total surplus = total economic gain in
Hereland has increased by area D, now is A+B+C+D, before was only A+B+C.
…
Notice free trade has the same effects as
starting use of new production technologies in the importing country.
Both free trade and new production
technologies result in greater supply, lower prices, and loss of current jobs.
…
Regardless of whether Thereland allows
imports of some other Product Y from Hereland, the residents of Hereland are
better off.
Therefore, it is better for Hereland
and all countries to end restrictions on imports, even if done unilaterally
starting with the “Hereland” of the USA.
The huge increase in USA living
standards would force all other countries to soon start the same unrestricted
imports policy.
…
The Figure 1 example is
for only one of thousands of products.
Product X jobs lost are
made up with jobs producing other and new products: jobs creating toys
subtracted, jobs creating software added.
Although the USA may have
an overall trade deficit, more imports than exports, the USA and all countries
always have an overall balance of payments which includes investments.
…
We don’t care about trade
deficits and surpluses among current U.S. states and we also should not care
about among all countries.
Some worry China is
gaining control of the U.S. economy by using money from trade surpluses with
the U.S. to invest in U.S. production and financial assets.
This is not a concern for
many reasons, including
-total foreign investment
including by China businesses is only about three percent of the U.S. GDP
-almost all employees
including managers of foreign-owned firms are U.S. citizens
In the worst case, the
U.S. government could nationalize (take over) foreign assets located in the
U.S.
…
From article: Globalization Isn't Killing Factory Jobs, by
Daniel Griswold
“According to a recent study by the Center for Business
and Economic Research at Ball State University in manufacturing from 2000 to
2010, of the 5.6 million disappeared jobs in manufacturing:
-USA productivity growth caused 85% of the job losses
-imports accounted 13%”
We don’t restrict development of
production technologies and we shouldn’t restrict imports.
… …
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