Effect of Free Trade on an Expanding Sector

Free trade takes place when goods and people move across the borders of the countries concerned without the application of restrictions such as tariffs and quotas. Free trade affects both the consumer and producer surplus, which can be demonstrated using the changes in demand and supply, affecting the price and quantity demanded. In an expanding sector, the demand for the products is usually higher than the supply (Mankiw & Taylor, 2011). The sector expands as producer tries to bridge the gap. However, due to the constraints of the economy, the producers are likely not to meet the demand. As a result, imports from other countries are brought in to supply the deficit units. The paper provides an analysis of the economic effect of free trade in an expanding market.

The Demand Curve for the Product in the Sector

The demand curve shows the changes in quantity demanded with the changing price in the domestic market. Free trade does not lead to the shift in demand curve because it affects the supply component of the economy.

The Equilibrium

The domestic supply and demand without the international trade settle into a given equilibrium with an identified quantity and price. The equilibrium price and quality are P₁ and Q₁ respectively (Besanko, Braeutigam, & Gibbs, 2011). The equilibrium system, in this case, is not affected by the international trade, free trade, or through a restricted trade.

The consumer surplus without trade is the area marked “A” while the producer surplus is area marked “B” in the graphs below respectively.

The Producer Surplus

With the expanding sector, the demand is likely to be higher than the domestic production, which implies that the price is likely to be high, while some consumers cannot afford or access the commodities. The free trade leads right-hand swing of the supply chain. Consequently, the swing results in the establishment of a new equilibrium point (Mankiw & Taylor, 2011). The price, in this case, decreases from P₁ to P₂, and the quantity increases from Q₁ to Q₂. The new supply curve for the sector is S_T.

In the free trade, the swing of the supply chains, the new equilibrium price, and quantity establish of a new consumer surplus in area C.

Remembering that the consumer surplus was in area “A” without the trade graph, then the consumers gain the area C-A as an additional surplus.

With the introduction of free trade, the new producer surplus is established in area D.

In addition, without the international trade (free trade), the producer surplus was a larger area B, and the domestic production has lost the area B-D.

The free trade leads into a net gain to the sector of the economy in the area marked N

As is evident form the analysis, free trade in an expanding sector of an economy affects some elements, including the supply, equilibrium, consumer surplus, and producer surplus. The supply in the sector increases due to the quality brought in from the foreign market, which is the key driver to the changes in other factors. The consumers are the gainers because the price charged decreases to a point where more commodities are bought. On the other hand, the local producers are the loser because of the reduced profits due to the declined price. The decreased price can lead to reduced domestic production, which can slow down the rate at which the sector expands.