The Welfare Analysis of Free Trade

1. The Welfare Analysis of Free Trade The fact that a nation unequivocally gains from international trade does not mean that all groups within the nation necessarily gain: in fact some groups will lose.

2. Tools of Welfare Analysis • Consumer Surplus (CS) • “the increase in the economic well-being of consumers who are able to buy the product at a market price lower than the highest price that they are willing and able to pay for the product. …Consumer Surplus is equal to the area below the demand curve and above the price line.” Thomas Pugel and Peter Lindert, International Economics, pp19 - 20

3. Tools of Welfare Analysis • Producer Surplus (PS) • “the increase in the economic well-being of producers who are able to sell the product at a market price higher than the lowest price that would have drawn out their supply. …Producer Surplus is the area above the supply curve and below the price line.” Thomas Pugel and Peter Lindert, International Economics, pp21 - 22

4. Tools of Welfare Analysis • Total Surplus (TS) • Total Surplus is the sum of Consumer Surplus and Producer Surplus. TS = CS + PS P S CS PS D Q 0