Transcript International Trade Chapter 9

Chapter 9
International Trade
Copyright (c) 1999 Harcourt Brace & Company, Canada, Ltd. All rights reserved.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade
How
does
international trade
affect economic
well-being?
Who gains and
who loses from
free trade among
countries?
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Overview
The Determinants of Trade
 The Winners and Losers From
Trade
 The Welfare Effects of a Tariff
 The Arguments for Restricting
Trade

Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Chapter 3: The Principle of
Comparative Advantage
Trade can benefit everyone in a society
because it allows people to specialize
in activities in which they have a
comparative advantage.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Principle of
Comparative Advantage
Comparative
Advantage describes the
comparison among producers of a
good according to their opportunity
cost.
The producer who has the smaller
opportunity cost of producing a good is
said to have a comparative advantage in
producing that good.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Determinants of International Trade
The
effects of international trade are
shown as the difference between the
domestic price of a good without trade
and the world price of a good.
A
country will either be an exporter of
the good or an importer of the good.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Determinants of International Trade
International trade
issues are no
different from
trading as it
applies to
individuals within
a community and
between provinces
and regions within
a country.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Equilibrium without Trade
Assume:
– A country that is isolated from the rest of
the world and produces tomatoes.
– The market for tomatoes consists of the
buyers and sellers of the country.
– Domestic Price adjusts to balance
Demand and Supply.
– The sum of consumer and producer
surplus measures the total benefits.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Equilibrium Without Trade
Domestic
Supply
Price
Tomato Market
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Equilibrium Without Trade
Price
Tomato Market
Domestic
Supply
Consumer Surplus
Producer Surplus
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Equilibrium Without Trade
When
an economy cannot trade in
world markets, the price adjusts to
equilibrate domestic supply and
demand.
The sum of consumer and producer
surplus measures the total benefits
that buyers and sellers receive from
the tomato market.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Impacts of International Trade
If
the country decides to engage in
international trade will it be an
importer or exporter of tomatoes?
Who will gain from free trade in
tomatoes and who would lose?
Would gains from trade exceed
losses?
Start by comparing market prices. . .
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Determinants of International Trade
 If
a country has a comparative advantage,
then the domestic price will be below the
world price and the country will be an
exporter of the good.
 If the rest of the world has a comparative
advantage, then the domestic price will be
higher than the world price and the country
will be an importer of the good.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Exporter
If
the world price of tomatoes is higher
than the domestic price, the country
would be an exporter of tomatoes,
when trade is permitted.
Producers of tomatoes will want to sell
their tomatoes at the world price,
hence output would increase and
domestic price would rise.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Exporter
Tomato Market
Domestic
Supply
Price
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Exporter
Tomato Market
Domestic
Supply
Price
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Exporter
As domestic suppliers produce more
tomatoes and sell some of the
additional output in the world market,
the domestic price will increase to the
world price.
The domestic country becomes an
Exporter!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Exporter
The
difference between domestic
demand at the world price and
domestic production is the amount
exported!
It
can be determined, graphically, that,
Exports will result in a net gain in
surplus (welfare).
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Exporter
Price
Tomato Market
Domestic
Supply
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Exporter
Price
Tomato Market
Domestic
Supply
World Price
Quantity
Exported!
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Exporter
Price
Tomato Market
Domestic
Supply
World Price
Net Gain
in Surplus!
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Importer
If
the world price of tomatoes is lower
than the domestic price, the country
would be an importer of tomatoes,
when trade is permitted.
– Consumers will want to buy the lower
priced tomatoes at the world price.
Producers
of tomatoes will have to
lower their output until the supply
price is equal to the world price.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Importer
Domestic
Supply
Price
Tomato Market
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Importer
Domestic
Supply
Price
Tomato Market
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Importer
As a result of a lower world market
price, the quantity demanded by the
domestic consumers will increase but
the domestic production decreases,
hence
the domestic country becomes an
Importer!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Importer
The
difference between domestic
demand at the world price and
domestic production is the amount
imported!
It can be determined, graphically, that,
Imports will result in a net gain in
surplus (welfare).
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Importer
Domestic
Supply
Price
Tomato Market
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Importer
Price
Tomato Market
Domestic
Supply
Amount
Imported!
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
International Trade Example - Importer
Price
Tomato Market
Domestic
Supply
Net Gain
in Surplus!
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Overview
The Determinants of Trade
 The Winners and Losers From
Trade
 The Welfare Effects of a Tariff
 The Arguments for Restricting
Trade

Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Winners and Losers From
Free International Trade
When
a country allows trade and
becomes an exporter of a good,
domestic producers of the good are
better off. They receive a higher price.
However, domestic consumers of the
good are worse off. They pay a higher
price.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Winners and Losers From
Free International Trade
When
a country allows trade and
becomes an importer of a good,
domestic consumers of the good are
better off. They pay a lower price.
However, domestic producers of the
good are worse off. They receive a
lower price.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Winners and Losers From
Free International Trade
Trade
raises the
economic wellbeing of the nation.
The net change in
total surplus is
positive.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Overview
The Determinants of Trade
 The Winners and Losers From
Trade
 The Welfare Effects of a Tariff
 The Arguments for Restricting
Trade

Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Welfare Effects of a Tariff
A
tariff is a tax on imported goods.
A tariff raises the price of imported
goods, above the world price by the
amount of the tariff.
Domestic suppliers of the tariffed good
are gainers while domestic consumers
of the good are losers.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Welfare Effects of a Tariff
Domestic
Supply
Price
Tomato Market
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Welfare Effects of a Tariff
Price
Tomato Market
Domestic
Supply
Amount
Imported
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Welfare Effects of a Tariff
Domestic
Supply
Price
Tomato Market
Tariff
}
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Welfare Effects of a Tariff
Domestic
Supply
Price
Tomato Market
Tariff
}
World Price
Domestic
Demand
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Welfare Effects of a Tariff
Domestic
Supply
Tomato Market
Price
Reduced
Consumption
}
Tariff
Increased
Production
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Welfare Effects of a Tariff
Domestic
Supply
Tomato Market
Price
Government
Revenue From
Tariff
}
Tariff
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Welfare Effects of a Tariff
Domestic
Supply
Tomato Market
Price
Deadweight
Losses From
Tariff
}
Tariff
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
The Welfare Effects of a Tariff
Deadweight Losses
 Like
any tax on the sale of a good, it
distorts incentives and pushes the
allocation of scarce resources away from
the optimum.
– Raises domestic prices and encourages more
production.
– Higher domestic prices reduces the amount
purchased by domestic consumers.
– DWL
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Overview
The Determinants of Trade
 The Winners and Losers From
Trade
 The Welfare Effects of a Tariff
 The Arguments for Restricting
Trade

Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Arguments for Restricting Trade
Arguments Against Free Trade
Jobs
National Security
Infant Industry
Unfair-Competition
Protection-as-a-Bargaining-Chip
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Conclusion...
Economists
see the benefits of trade
between countries the same way as
they see the benefits of trade between
provinces, cities and people.
Any individual would have a much
lower standard of living if she or he
had to produce all of the goods that
this individual planned to consume!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition
Overview
The Determinants of Trade
 The Winners and Losers From
Trade
 The Welfare Effects of a Tariff
 The Arguments for Restricting
Trade

Principles of Microeconomics & Principles of Macroeconomics: Ch.9
First Canadian Edition