We will now look at an economy that allows free world trade with no restrictions. If the world trade price is lower than the domestic price, consumers will want to purchase more. We will assume that the world price is represented by Pw.
- If you follow the Pw line straight across, you see that it crosses the domestic supply curve first. Domestic suppliers will only supply Qwd.
- Continue to follow the Pw line until it crosses the domestic demand line. The Pw line intersects with that demand line at Qw. Domestic suppliers cannot meet the quantity demanded at lower prices.
- The distance between Qw and Qwd will be the amount of product that will have to be imported to meet the quantity demanded at the world price. In this instance, consumer surplus increases while producer surplus decreases.
The winners in a free world trade economy are the consumers, while the losers are the domestic producers.
