In this section of the course, we're going to be looking at the EU, which is the largest economically integrated group of countries in the world. In order to understand the conversation there and to understand when we talk about the benefits of trade, I wanted to take you just very quickly through a couple of notions that we covered in the globalization course about how trade benefits people and how migration benefits people. I'm going to take a simple approach. There are many, many ways to illustrate this but a lot of them will involve a lot more time. So we're just going to go to the basic concepts. What we're going to do to think about the benefits of trade, is we're going to draw a supply and demand diagram. This is used a lot in economics, it's our basic tool. We've got demand as a down sloping curve, which just means that with a given price and quantity, the lower the price the higher the quantity of goods that we are going to want to buy. The higher the price, the lower the quantity I'm going to want to buy. And then we draw an up sloping supply curve. All right. And this supply curve tells us the opposite. If prices are low I'm not going to want to produce much because my profits, all other things equal are lower. If price is higher I'm going to want to produce more to maximize this profits. And we find that at any given moment in time equilibrium is reached in the market wherever these two curves meet one another. So, we'll have an equilibrium quantity, where quantity supplied and quantity demanded are equal to one another and then we'll have an equilibrium price. So let's imagine that this is a market for any good. We can pick one, automobiles. This is the market for automobiles and we are inside a country, maybe we're inside the UK. All right? And there's no EU. The UK is all by itself. So, given this equilibrium at P sub e and Q sub e, there are two areas that we can identify here on this graph. One is something that we're going to call the consumer surplus. This is the area under the demand curve down to the going price. The idea is this, along this demand curve there are lots of different quantities that would have been bought at different prices. Up here for instance, there's somebody who would have paid that high price for a car. However, when they went to the market to buy it, they found that that was the price. So, in a sense that person carries away a surplus. The car was worth this much to them. They only had to pay that much. And all along this curve, we find people that were willing to pay a higher price for the car and they only had to pay this price. So all of this area, under the demand curve down to the equilibrium price is what we call consumer surplus. There's another area here which is producer surplus. And that's the area that's under the price above the supply curve. Here's the idea, that producers, let's say there's a producer down here at the bottom of the curve, maybe right here. Who had really low cost, he could have put a car on the market at this price. When he goes to the market, he finds the price is actually this one. Here's another one that had low cost, he could have put a car on the market at this price. Instead he gets this price. And so as we go along the curve, we find a lot of producers who were competitive, you could have put their good on the market at a lower price and instead they get that high market price. We call that surplus. Now, economists consider the national welfare and this is of course a very material way of defining it. But anyway it's what it is, is the sum of consumer plus producer surpluses. So, our total welfare as a country is this area. The area under this curve, the area above, this curve. This entire area is consumer and producer surplus or total welfare, total or national welfare. Well, let's imagine that the UK opens its doors and says, ''I'd actually like to export cars to the rest of the world because the price of cars in the world is higher than it is here at home.'' I've put Pw there, world price. So the UK looks out and they say, ''Gosh I could sell out there. That would be better, I could get more money for my cars.'' So, the UK becomes an exporter of cars. Watch what happens. If I put this price on the demand curve, I find that now, since the price of cars has gone up in the UK, this becomes the quantity demanded, consumers buy that many cars. And since the supply curve crosses price here, this is the quantity supply. This is how many cars the British manufacturers are going to put on the market. So, you see actually they're demanding less than they produce and they're going to export the rest. So, this is the situation of an exporting country. Now, let's think about consumer and producer surplus. And here, you're going to have to imagine, I'm going to draw another color over here so that we can picture it. But think of this price being up here. Now, I look at the area under the demand curve and I find that my consumer surplus is only this area. It has shrunk. The consumers are a little worse off and if you're a country that exports something you know this happens. Like the good you liked; Argentine best beef becomes more expensive. The producer surplus however has grown. So, it's not just this area that we had before, but it's expanded into the consumer surplus. They got this away from consumers, plus there's a new area here. There's a new area here. And that area just represents the fact that this country is now taking advantage of the fact that its goods are attractive on the world market. Greater efficiency is being obtained from trade and the country gains this little triangle of surplus. So, you see that total surplus with trade has risen when we are an exporter. We've gained this. Let's imagine now that we're an importer. So, trying a different color and seeing if we can figure this all out. I imagine that the UK opens its doors to trade and it finds to its surprise that the price of goods outside, the price of automobiles outside, is lower than the price in the UK. So, the UK says, ''Well I think I'll buy my goods abroad, I'll buy my cars abroad.'' Now, let's see what happens to consumer and producer surplus. First of all we find, that this becomes the quantity supplied of cars because since that price is low the UK produces fewer cars. But the quantity demanded becomes this one over here. So, because the British are now able to buy a lot more cars since they're cheaper. The difference between these two quantities is going to be our imports of cars. Now, if we take a really quick look at consumer and producer surplus. Again remembering that producer surplus is the area above the supply curve up to the going price. And the consumer surplus is the area below the demand curve to the going price. Look what happens. Our consumer surplus grows drastically. It's all of this area and I don't know if you can see it here, but anyway it continues out here. It's all of this area. This area disappears. But it takes in all of this. The producer surplus however shrinks. It's now only this area down here under the blue line. So, producers are earning less, consumers have much more, and once again total welfare rises. The message is that when we engage in trade both as an exporter and as an importer we gain, both sides gain. Trade is a win, win situation. Now, obviously there are some adjustments that have to be made and there is a group that's going to lose out and they're going to ask for protection. But if the whole country is gaining, there's extra money that we can use to compensate the people who are losing out. There's another very quick analysis I'd like to do with you before we start the EU section, which is just to show in a really simple way what happens when a country receives immigrants. Normally, when we hear the public debate, we read the papers, it sounds like it's really going to hurt us. But let me just show you in a couple of minutes how immigration benefits the country that receives immigrants. So, here we're going to draw an aggregate demand curve, a curve of demand for the whole economy. Everybody within that country. Everything that they want to buy of all kinds of goods. And then we're going to draw an aggregate supply curve, which is all the goods supplied by all different units, business units, producing units in the country. This is actually the supply and demand curve for a whole country. So we're combining all the goods not just automobiles, everything people buy, everything people sell. So, this is aggregate supply and this is aggregate demand. All of it put together. All right. So, aggregate demand moves when people want to buy more of something, when consumers, investors, the government, or foreigners want to buy more of our goods. And that will change our equilibrium. Aggregate supply moves when we either have more factors of production; capital, people to work with or a costs change. And the place where these two curves meet one another will be the country's GDP. Over here, we're going to have the country's price level which indicates it's inflation. Remember that when GDP gets bigger as we described a little earlier, when GDP gets bigger and we move this way unemployment goes down. And remember when GDP gets smaller, we move this way, unemployment comes up. All right? Now, the dynamics of this we work with a lot in the understanding economic policy making course. I'm just taking a really quick look at it so you can see immigration. So, let's imagine here we are a country with a given GDP which gives us a given unemployment rate, a given price level. And all of a sudden a group of immigrants come into the country. Think about what will happen. The first thing that happens is that the country has more people to produce its goods with. So, what will happen on this graph is aggregate supply moves out to the right. Because we have a larger labor force, we can produce more of most things. At the same time, since more people are coming into the country, they want to buy more things. So aggregate demand is also going to shift out to the right. So we've had average supply moving in this direction, aggregate demand moving in this direction. Let's see what our new equilibrium looks like. And here you're going to get a surprise. The new aggregate demand curve which is this one, meets the new aggregate supply curve which is this one over here. This is our new equilibrium. It's this new GDP, which is larger, and this new price level which is smaller. GDP has gone up, price level has gone down. The country has experienced more growth because it's got more people to produce goods with, and the price level has gone down because these people are coming in at lower wages. That means all of us experience lower prices for our products. But I want you to notice this part. Look what happens to unemployment. Unemployment declines as we accept immigrants. And the reason it declines is that we are producing more and therefore the economy needs more workers. Now, some of you may think that this looks like voodoo, right? That everybody knows that unemployment rises when immigrants come in. But actually if you do cross-country studies, you see which countries accept more immigrants, you find they are not the countries with higher unemployment rates. In fact often it's exactly the opposite.
