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In my last article about taxes , I argued import taxes should be lowered. I did not succeed in getting that done.Let me try again. The article you are about to read was not written by me. It was written by a man named Kemal Ergenekon . The original article was actually written for another game, the link can be found by going here . The only thing I changed was writing eSim where the original used another name. Anything I added is in italics.

During my time on eSim, I have come to see many different opinions on international trade policy. Considering how controversial the topic is in the real world, it is no wonder that the divergences occur here as well. It directly affects the welfare of the country, and it creates winners and losers at the same time.

On the other hand, eSim provides us clearly defined rules that make it possible to predict the influences of policy decisions exactly, at least qualitatively. The lack of consensus on the outcomes of international trade policy is therefore not a product of theoretical disagreement, but lack of pre-knowledge of existing international trade models and literature.

No one can expect our congressmen and executives to be experts on economic theory, but they should at least be acquainted with the basics. In order to have better policy decisions, I will try to address the international trade issue in my article.

In the beginning, I will provide the baseline model of international trade that is used in the real world. Then I will extend the model to take into account specific additions that the eSim system has, that don’t exist in the real world. In the end, I will discuss what policy implications the model implies, especially for the US. I will also exactly explain who are the winners and losers in with free trade policy vis-a-vis protectionism.

This article is intended to be a tl;dr document, so that it can be used for educational purposes in the future. You may want to skim over some parts, to get to the part you are interested in.

The Baseline International Trade Model

For the most simple exposition, we will use a partial equilibrium model: The classical supply-demand, with and without international supply. I will explain each component as we go along. Think of the industry in question as the market for Q5 weapons if you would like.

Supply – Demand Model for a Closed Economy


The first figure is the traditional supply-demand graph that summarizes Adam Smith’s idea: Everything else equal, consumers would like more of a good if it is cheaper, and producers would supply more of a good if the price increases. The supply and demand schedules are the aggregate amount of goods that consumers are willing to buy, and the producers are willing to provide, given a price.

The point where two schedules cross each other is the equilibrium of the economy: A pair (P*,Q*): Equilibrium price and equilibrium quantity. In an equilibrium the markets must clear – i.e. supply must equal demand. This is exactly where the curves meet. You can think of yourself how the equilibrium price and quantity would change if one of the curves moves up or down (e.g. demand for weapons would go up during a major battle, the supply of food would increase if the country acquired more food raw materials, etc.)



In the second figure you see two colored areas. The red one is called “Consumer Surplus”, and the blue one is called “Producer Surplus”. They are offered as appropriate welfare metrics that measure the well-being of consumers and producers. Although I wouldn’t advocate they are what we should care about in actuality, they are both very simple to calculate, and qualitatively they yield the same conclusions as you would derive from the most complicated Dynamic Stochastic General Equilibrium model you could come up with. So they are good enough proxies for our analysis.

Intuitively, you could think of consumer surplus as the difference between what the consumers were willing to pay, and what they actually paid. The guy who was willing to pay 7 USD for a Q5 gun, but who paid 5 USD, has a “surplus” of 2 USD. If we sum this across all consumers and purchases, it becomes the integral of the demand curve minus the price line, up until the quantity demanded. Yes, exactly the red area.

The producer surplus is linearly related with profits in most microeconomic models of the firm, so just think of it as the total profits earned by the producers. The only thing it doesn’t include is fixed costs (like the cost of opening the firm).

The sum of Consumer Surplus and Producer Surplus is called Total Surplus, and can be considered a welfare metric for the overall welfare of the country.

Up until now, I have introduced the supply-demand model for a closed economy. Now we will move on to an open economy by introducing foreign supply.

Supply – Demand Model for an Open Economy


In the third figure, we have an additional line in the model: foreign supply. What it reflects is the lowest price in the world that producers are willing to supply the good at. It is nearly a flat line in comparison to the domestic demand, because the number of producers in the world is so large that a change in domestic demand of the country we are considering doesn’t affect their supply decision too much.

You can see that the equilibrium price in the open economy is lower than the closed economy case: this is because the world price of the good is lower. The opposite could never be true in eSim, because it is impossible to prevent exports, so it is not considered here.

Now you can see that the domestic supply and domestic demand curves do not cross each other at the equilibrium price. Domestic supply at P** is lower than domestic demand at P**. This difference is exactly equal to Imports / Foreign Supply. Now let’s consider how our welfare metrics have changed:



As you can see, the red area we call Consumer Surplus has increased in comparison to the closed economy case. But Producer Surplus decreased. Total Surplus has increased since the total shaded area increased by the triangle you see.

What does this mean in eSim sense? Allowing imports have increased the buying power of the citizens: They bought more weapons at a cheaper price. But the weapons producers in the country suffered a loss in profits.

The model predicts that open trade is better for the country, and this is what 100% of the economists would agree in the absence of other concerns. The only concerns in the real world are stuff like unemployment (we have none in eSim), infant industry argument (the production function is fixed in eSim), and national security issues.

In eSim, we have one policy tool, import taxes, that allows us to determine how open or closed our economy is. Now we will look in the grey area between a totally open and a closed economy.

Import Taxes



In this last figure, you see two foreign supply lines. The lower one is the foreign supply when there are no import taxes for this industry. The upper one is the foreign supply when there is 20% import taxes. The height between them is exactly equal to 20% of the lowest world price. The graph exactly shows you the effect of an increase/decrease in import taxes: If the import taxes are high, the equilibrium price in the economy will be higher and the quantity bought will be smaller. The government will be able to accrue some tax revenues from the whole ordeal. Let’s look at how our welfare metrics change:

Consumer Surplus:

-With Import Taxes: A
-Without Import Taxes: A + B + C + E + F

Producer Surplus:

-With Import Taxes: B + D
-Without Import Taxes: D

Government Revenues:

-With Import Taxes: C + F
-Without Import Taxes: none

Total Surplus:

-With Import Taxes: A + B + C + D + F
-Without Import Taxes: A + B + C + D + E + F

What does all of this mean? Increasing import taxes increases the government revenues somewhat, and increases the profits of domestic firms, but makes the consumers much worse off. They both face higher prices, and choose to consume fewer weapons (which would mean a drop in the damage output of the country in eSim). The total surplus is also lowered by high import taxes.

So in the end, any increase in import taxes results in transfer of wealth from the consumers to the producers. In eSim terms, this means transfer of wealth from the low and middle income players, to old players with many companies, or Q5 company owners who produce hundreds of weapons in a given day.

At the end of the day, what our government tries to do is to maximize the effectiveness of our military power, and increasing our total damage output. How would this wealth transfer affect the total damage output?

The low and medium income players would use the extra money they have to buy food and weapons that they lack, so that they can hit more; increasing the total damage output of the country.

Please continue reading in part 2

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