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    Free Trade / Surplus

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    2. The world price of wine is below the price that would prevail in the United States in the absence of trade.

    a. Assuming that American imports of wine are a small part of total world wine production, draw a graph for the U.S. market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in an appropriate table.

    b. Now suppose that an unusual shift of the Gulf Stream leads to an unseasonably cold summer in Europe, destroying much of the grape harvest there. What effect does this shock have on the world price of wine? Using your graph and table from part (a), show the effect on consumer surplus, producer surplus, and total surplus in the United States. Who are the winners and losers? Is the United States as a whole better or worse off?

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    Solution Preview

    The world price of wine is below the price that would prevail in the United States in the absence of trade.

    a. Assuming that American imports of wine are a small part of total world wine production, draw a graph for the U.S. market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in an appropriate table.

    P Wine Market

    S (domestic)

    A

    P*
    Pw B D E Pw C

    D
    Q
    Qs Q* QD

    Consumer ...

    Solution Summary

    The expert examines free trade surplus.

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