Trade, Tariffs and DeadWeight Loss:

Should we Import?

If the domestic price of a good (Pd) is higher than the world price (Pw)of a good, it means that the rest of the world (or some country out there) can produce the good cheaper than we can.

This implies that the other country (or the world) has a comparative advantage (CA) over us, in the production of this good.

Thus it makes sense for us to import the good from abroad.
As we start importing the cheaper goods from abroad, the domestic price will drop, due to competition, and this drop will continue till the price within the country has equaled the world price.

Should we Export?

If the domestic price of a good (Pd) is lower than the world price (Pw)of a good, it means that the we can produce the good cheaper than rest of the world (or some country out there).

This implies that the we have a comparative advantage (CA) over other country (or the world), in the production of this good.

Thus it makes sense for us to export the good to abroad.

As we start exporting the cheaper goods to abroad, the domestic price will rise, because the domestic cupplier would rather sell to foreigners than to domestic consumers, and this increase will continue till the price within the country has equaled the world price. 

Does Importing Lead to an increase in Welfare known as total of (Consumer+Producer) Surplus?

•When we import, surplus increases at the cost of the domestic suppliers.

•The consumer surplus increases, as more domestic consumers can afford to consume the good, but prducers surplus decreases as some domestic suppliers will have to shut shop, as they it is no longer feasible for them to produce and sell at the lowered market price for their product.

•Overall the surplus increases.

Does Exporting Lead to an increase in (Consumer +Producer) Surplus?

•When we export, surplus increases at the cost of the domestic consumers.

•The consumer surplus decreases, as less domestic consumers can afford to consume the good at the increased prices, but producers surplus increases as more domestic suppliers get to produce and sell.

•Overall the surplus increases.

Tariffs and Surplus?

•Tariffs are taxes imposed on imports.

•Effectively tariffs increase the market price of the product in the domestic markets.

•Tariffs will benefit some domestic suppliers, who were not being able to produce and sell domestically before the tariffs because the market price of the good, due to competition from cheap imports, was way too low for them to be in business for.

•Tariffs will harm some domestic consumers, for whom the good will now become unaffordable, even when, before tariff, they were being able to successfully pay the lower price.

•Thus the market will shrink in comparison to free trade, leading to a deadweight loss.