Producer surplus is the price a producer sells its product for in excess of the cost of production, this is profit.
Total surplus = consumer surplus + producer surplus = total economic gain.
For an economy maximizing total surplus should be the goal.
It doesn’t matter if consumer surplus or producer surplus is greater.
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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.
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Economists in Hereland convince 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 and consumed of X in Hereland increases from 20 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.
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Hereland consumer surplus becomes areas A + B + D.
Hereland producer surplus becomes area C.
Area B was part of producer surplus before, now it’s part of consumer surplus.
Total surplus = total economic gain in Hereland has increased by area D, now is A+B+C+D, before was only A+B+C.
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Notice free trade has the same effects as implementing use of new production technologies in the importing country.
Both free trade and new production technologies result in greater supply, lower prices, loss of current jobs and creation of new jobs.
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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 “Hereland.”
The huge increase in Hereland living standards would force all other countries to soon start the same unrestricted imports policy.
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The Figure 1 example is for only one of thousands of products.
Product X jobs lost are made up with jobs producing other mostly new products, e.g. jobs creating toys subtracted, jobs creating software added.
Although Hereland may have an overall trade deficit - more imports than exports - the Hereland and all countries always have an overall balance of payments which includes investments.
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In the U.S. 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 other countries gain 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 and take over our economy.
This is not a concern for many reasons, including:
-total foreign investment 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.
In the case of China, and all countries, free trade disables special interests-protecting politicians and enables general interests businesspeople and consumers.
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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, from 2000 to 2010 of the 5.6 million jobs lost in manufacturing USA, productivity growth caused 85% of the job losses and increased imports caused 13%.”
We don’t restrict development and implementation of production technologies nor restrict imports from e.g. Illinois into Indiana, and we shouldn’t restrict imports from other countries into the U.S.
No one cares if Indiana has a trade deficit with Illinois (it is unknown, such data is not gathered) and we shouldn’t care if the U.S. has a trade deficit with Japan.
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If there were no trade restrictions among countries, same as among U.S. states, how much would the world's total GDP rise?
Grok:
Fully eliminating global trade restrictions—similar to U.S. interstate commerce—could boost world GDP by 1–10%, with conservative estimates around 4.7% for partial supply chain improvements and potentially double digits for complete barrier removal, benefiting developing regions most.
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If there were no restrictions on trade, movement of people, and movement of assets among countries, same as among U.S. states, how much would the world's total GDP rise?
Grok:
Fully eliminating global restrictions on trade, people movement, and assets—similar to U.S. interstate freedoms—could increase world GDP by 50–150%, driven mainly by free labor mobility (open borders for migration) yielding 67–147% gains
Trade and capital barrier removal add smaller boosts of under a few percent each.
Developing countries would benefit most, though estimates vary based on model assumptions and potential externalities.
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Here’s a helpful video Imports, Exports, and Exchange Rates.
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