When a country is open to international trade, the prices in the domestic economy don't only reflect domestic factors, but are also affected by changes in the international market as well. Consider this recent story from the New Zealand Herald:
If you feel like red meat is more expensive than it used to be, you're right.
Around 95 percent of New Zealand's sheep meat and 87 percent of beef is exported, and what's left behind for locals is being sold at a premium.
In January 2007, 1kg of beef mince would have cost $9 according to Stats NZ's food price index. If you put a pack in your shopping trolley in January this year, it would have cost $16.39...
Beef + Lamb NZ chief executive Rod Slater said the cost of meat in New Zealand reflected what markets overseas were willing to pay...
One of the emerging buyers for our red meat is China.
African swine flu decimated the country's pig numbers in 2018 and former trade negotiator and founder of consultancy Sanders Unsworth Charles Finny said this was why China had been importing more beef and lamb.
Consider the domestic market for beef, as shown in the diagram below. New Zealand is an exporting country, which means that New Zealand has a comparative advantage producing beef. That means that New Zealand can produce beef at a lower opportunity cost than other countries. On a supply-and-demand diagram like the one below, it means that the domestic market equilibrium price of beef (PD) would be below the price of beef on the world market (PW). Because the domestic price is lower than the world price, if New Zealand is open to trade there are opportunities for traders to buy beef in the domestic market (at the price PD), and sell it on the world market (at the price PW) and make a profit (or maybe the suppliers themselves sell directly to the world market for the price PW). In other words, there are incentives to export beef. The domestic consumers would end up having to pay the price PW for beef as well, since they would be competing with the world price (and who would sell at the lower price PD when they could sell on the world market for PW instead?). At this higher price, the domestic consumers choose to purchase Qd0 beef, while the domestic beef farmers sell Qs0 beef (assuming that the world market could absorb any quantity of beef that was produced). The difference (Qs0 - Qd0) is the quantity of beef that is exported. Essentially the demand curve with exports follows the red line in the diagram.
In terms of economic welfare, if there was no international trade in beef, the market would operate at the domestic equilibrium, with price PD and quantity Q0. Consumer surplus (the gains to domestic timber consumers) would be the area AEPD, the producer surplus (the gains to domestic beef farmers) would be the area PDEF, and total welfare (the sum of consumer surplus and producer surplus, or the gains to society overall) would be the area AEF. With trade, the consumer surplus decreases to ABPW, the producer surplus increases to PWCF, and total welfare increases to ABCF. Since total welfare is larger (by the area BCE), this represents the gains from trade. So to summarise, exporting beef makes domestic beef consumers worse off (lower consumer surplus), domestic beef farmers better off (higher producer surplus), and society overall better off (higher total welfare).
Now consider how the change in demand from China affects the world market for beef, as shown in the diagram below. World demand has increased from DW0 to DW1, and that increases the equilibrium world price from PW to PW1.
Now, let's go back to the New Zealand domestic market for beef. The world price has increased from PW to PW1, as shown in the diagram below. Now, the domestic consumers have to pay the higher price PW1 for beef, since they are still competing with the world price (and the world price is now higher). At this higher world price, the domestic consumers now choose to purchase Qd1 beef, while the domestic beef farmers now sell Qs1 beef (still assuming that the world market could absorb any quantity of beef that was produced). The quantity of exports is now (Qs1 - Qd1). That means that more beef is now being exported.
What does that mean for economic welfare? With the higher world price, the consumer surplus decreases further to AGPW1, the producer surplus increases further to PW1HF, and total welfare increases further to AGHF. In other words, the increase in the world price of beef makes domestic consumers worse off (which is what the article notes), but it makes domestic beef farmers better off, and society overall better off.
Domestic consumers are affected by events on the world market, when the domestic market is open to international trade. However, openness to international trade is not all bad news for consumers. If international demand falls, the domestic price will fall and consumer surplus will increase (essentially, the opposite of the example above). And, New Zealand is not an exporter in all markets. In markets where New Zealand is a net importer, prices are lower, and consumer surplus is higher, than they would be without trade.
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