The surge can be represented as a reduction in the world price of the imported good from P 1 to P 2 . This would occur if there is an increase in total world supply of textiles of sufficient size to reduce the world price of the good. Since this importing country is assumed to be small, it must take the world price as given. The lower price would stimulate demand for the product which would rise to D 2 . The welfare effects of the lower world price is shown in the Table below.
Producers lose in terms of a reduction in producer surplus.
However the unemployment imperfection implies that there is an additional cost which is hidden in this analysis. For domestic firms to reduce output requires them to reduce variable costs of production which will include layoffs of workers. This means that the adjustment to the new free trade equilibrium will cause unemployment and its associated costs. We'll represent these unemployment or adjustment costs by the variable F. Note these costs do not appear in the diagram above. Thus the national welfare effect could be positive or negative.