International Trade Theory and Policy
by Steven M. Suranovic
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Trade 70-15
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Aggregate Welfare Effects of Free Trade in the Immobile Factor Model
The adjoining diagram compares autarky and free trade equilibria for the US and France. The US PPF is given by the red dot at A while France's PPF is given by the green dot at A. We assume both countries share the same aggregate preferences represented by the indifference curves in the diagram. The US autarky production and consumption points are determined where the aggregate indifference curve touches the US PPF at the point A. The US realizes a level of aggregate utility which corresponds to the indifference curve IAut. The US production and consumption points in free trade are A and C, respectively. The US continues to produce at A since factors are immobile between industries but trades to achieve its consumption point at C. In free trade the US realizes a level of aggregate utility which corresponds to the indifference curve IFT. Since the free trade indifference curve IFT lies to the north east of the autarky indifference curve IAut, national welfare rises as the US moves to free trade. France's autarky production and consumption points are determined where the aggregate indifference curve touches France's PPF at the point A. France realizes a level of aggregate utility which corresponds to the indifference curve IAut. French production and consumption in free trade occurs at A and C, respectively. In free trade France realizes a level of aggregate utility which corresponds to the indifference curve IFT. Since the free trade indifference curve IFT lies to the north east of the autarky indifference curve IAut, national welfare also rises as France moves to free trade. This means that free trade will raise aggregate welfare for both countries relative to autarky. Both countries are better-off with free trade. International Trade Theory and Policy - Chapter 70-15: Last Updated on 1//15
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