Economic welfare analysis in India Rubber

Topics: International trade, Supply and demand, Free trade Pages: 11 (2807 words) Published: May 25, 2014
MANAGERIAL ECONOMICS M INDIVIDUAL ASSIGNMENT

THE CIRCUSTOM OF THE CASE:

BALANCE SHEET OF INDIA NATURAL RUBBER

TONNES

APRIL TO
JANUARY

2012-2013

2013-2014

CHANGE
PRODUCTION
798,200

723,000

-9.42%
CONSUMPTION

811,110

IMPORT
195,543

279,627

+43%
EXPORT
15,632

5,357

-65.73%

Questions:

(a) Using the concepts and diagrams outlined in our seminars, explain fully the impact on India’s economic welfare of access to the world market for natural rubber

International trade provide the comparative advantage. All countries can be the beneficiaries when trade with one another, because trade allows each country to specialize in doing what it does best. However, the seller or buyer may be damaged from international trade because the world price may higher or lower than domestic balancing price, then it may impact on producer or consumer’s surplus and continue to change the countries’ economic welfare for this import or export market

Before international trade, the participator of India’s natural rubber market only include domestic buyers and sellers, as the Figure a-1 shows, the domestic price is balancing between quantity supplied by domestic seller and the quantity demanded by domestic buyers, hence, the sum of the consumer and producer surplus which also called economic welfare in the equilibrium point measures the total benefits received by India’s rubber market from domestic consumer and domestic producer. In Figure a-1, without international trade, the sum of India’s economic welfare are the area A plus area B

When accessing the world market for natural rubber, India’s economic welfare changes. Within the scenario, India is either an importing country or an exporting country, it import large amount of rubber and export were insignificant.

Figure a-2 shows that India as an importing country of natural rubber. The diagram presents that India’s domestic equilibrium price of natural rubber, also named price before trade is above the world price. Trade force the domestic price fall and equal to the world price, due to the lower new price (world price), the quantity of consumed domestically higher than the quantity of produced domestically and the import b India equal to the difference between the domestic quantity supplied and the domestic quantity demanded at the world price.

In this situation, domestic buyers are better off due to them now can buy rubber in lower price. However, domestic producer are damaged because they sell the rubber now in lower price.

Moreover, consumer surplus and producer surplus also change and the change size also measure the amount of gain or loss. Combine Figure a-1 and Figure a-2 to Table a-3 shows that before trade, consumer surplus is area A, producer surplus is area B+C, and total surplus is area A+B+C. After trade, the consumer surplus becomes area A+B+D and producer surplus only in area C and total surplus is area A+B+C+D.

The calculation illustrate above show that, India’s buyers gain from trade in an importing country because consumer surplus area enlarged B+C. In spite of this, India’s sellers suffer loss because the producer surplus area decrease by area B. In any event, the gains of buyer exceed the losses of sellers, and total surplus grow by the area D

As previous stated, when India access world market and import large amount of natural rubber, the consumer welfare, producer welfare and total economic welfare of natural rubber market changes respectively. However, the gains from international trade exceed the losses which means the increases could compensate the decreases and still be better off.

As Table a-3 shows, the total surplus also can treat as total economic welfare rises in area D and it represents the gain from the trade. In other words, trade internationally make India better off no matter...
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