Transcript Chapter Nine

Chapter 9
International Trade
Objectives
1. Understand the basis of
international specialization
2. Learn who gains and who
loses from international trade
3. Recognize that the gains from
international trade exceed the costs
4. Understand the welfare effects
of tariffs and quotas
5. Evaluate the merits of arguments
to restrict international trade
International Trade
How
does
international trade
affect economic
well-being?
Who
gains and
who loses from
free trade among
countries?
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.
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.
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.
Determinants of International Trade
International trade
issues are no
different from trading
as it applies to
individuals within a
community and
between states and
regions within a
country.
Equilibrium without Trade
Assume:
– A country that is isolated from 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.
Equilibrium Without Trade
Domestic
Supply
Price
Tomato Market
Domestic
Demand
Quantity
Equilibrium Without Trade
Price
Tomato Market
Domestic
Supply
Consumer Surplus
Producer Surplus
Domestic
Demand
Quantity
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.
Impacts of International Trade, example
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. . .
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.
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.
International Trade Example - Exporter
Tomato Market
Domestic
Supply
Price
World Price
Domestic
Demand
Quantity
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!
International Trade Example - Exporter
The
difference between domestic
demand at the world price and
domestic production is the amount
exported!
International Trade Example - Exporter
Price
Tomato Market
Domestic
Supply
World Price
Quantity
Exported!
Domestic
Demand
Quantity
Price
of
Steel
How Free Trade Affects Welfare
In An Exporting Country (fig. 9-3)
Domestic
supply
Price
after
trade
A
B
Price
before
trade
}
Exports
World
Price
D
C
Domestic
demand
Quantity of Steel
Changes in Welfare From Free Trade:
The Case of an Exporting Country
(Table 9-1)
Before Trade After Trade
Consumer Surplus
A+ B
A
Producer Surplus
C
B+C+D
Total Surplus A + B + C A + B + C + D
Change
-B
+(B + D)
+D
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.
International Trade Example - Importer
Domestic
Supply
Price
Tomato Market
World Price
Domestic
Demand
Quantity
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!
International Trade Example - Importer
The
difference between domestic
demand at the world price and
domestic production is the amount
imported!
International Trade Example - Importer
Price
Tomato Market
Domestic
Supply
Amount
Imported!
World Price
Domestic
Demand
Quantity
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.
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.
How Free Trade Affects Welfare
In An Importing Country (fig. 9-5)
Price
of
Steel
Price
after
trade
A
B
D
C
}
Price
before
trade
Domestic
supply
World
Price
Imports
Domestic
demand
Quantity of Steel
Changes in Welfare From Free Trade:
The Case of an Importing Country
(Table 9-2)
Before Trade After Trade
Consumer Surplus
A
A+ B + D
Producer Surplus
B+C
C
Total Surplus A + B + C A + B + C + D
Change
+(B + D)
-B
+D
Winners and Losers From
Free International Trade
Trade
raises the
economic wellbeing of the nation.
The net change in
total surplus is
positive.
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.
The Welfare Effects of a Tariff
Domestic
Supply
Price
Tomato Market
World Price
Domestic
Demand
Quantity
The Welfare Effects of a Tariff
Price
Tomato Market
Domestic
Supply
Amount
Imported
World Price
Domestic
Demand
Quantity
The Welfare Effects of a Tariff
Domestic
Supply
Price
Tomato Market
Tariff
}
World Price
Domestic
Demand
Quantity
The Welfare Effects of a Tariff
Domestic
Supply
Price
Tomato Market
Tariff
}
World Price
Domestic
Demand
Quantity
The Welfare Effects of a Tariff
Domestic
Supply
Tomato Market
Price
Reduced
Consumption
}
Tariff
Increased
Production
Quantity
The Welfare Effects of a Tariff
Domestic
Supply
Tomato Market
Price
Government
Revenue From
Tariff
}
Quantity
Tariff
The Welfare Effects of a Tariff
Domestic
Supply
Price
Tomato Market
Deadweight
Losses From
Tariff
A
B
C
D
E
F
G
Quantity
}
Tariff
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
The Effects of an Import Quota (fig. 9-7)
Price
of
Steel
Domestic
supply
Equilibrium
without trade
A
Quota
Isolandian
price with
quota
C
Price
without
quota=
World
price
0
B
D
Q
E’
Equilibrium
with quota
E” F
World
Price
Imports w/quota
Domestic
demand
Imports w/o quota
QS1
QS1
Domestic supply
+ Import supply
QD2
QD1
Quantity of Steel
Changes in Welfare From an Import Quota
(Table 9-4)
Consumer Surplus
Producer Surplus
License-holder surplus
Total Surplus
Before Quota
After Quota
A + B + C + D + E' + E" + F
A+ B
G
C+ G
None
E' + E"
A + B + C + D + E' + E" + F + G A + B + C + E' + E" + G
Change
- (C + D + E' + E" + F)
+C
+ (E' + E")
- (D + F)
Arguments for Restricting Trade
Arguments Against Free Trade
Jobs
National Security
Infant Industry
Unfair-Competition (Dumping)
Protection-as-a-Bargaining-Chip
Trade Imbalances
Other Benefits of International Trade
Increased
variety of goods
Lower costs through
economies of scale
Increased competition
Enhanced flow of ideas
Summary...
A Parable of Free Trade
Throughout
its history, the United
States has allowed unrestricted trade
among the states, and the country as a
whole has benefited from the
specialization that trade allows.
Parable of Isoland. . .
Summary
The effects of free trade can be determined
by comparing the domestic price without
trade to the world price.
 A low domestic price indicates that the
country has a comparative advantage in
producing the good and that the country
will become an exporter.
 A high domestic price indicates that the
rest of the world has a comparative
advantage in producing the good and that
the country will become an importer.

Summary
 When
a country allows trade and
becomes an exporter of a good,
producers of the good are better off,
and consumers of the good are
worse off.
 When a country allows trade and
becomes an importer of a good,
consumers of the good are better
off, and producers are worse off.
Summary
tariff – a tax on imports –
moves a market closer to the
equilibrium than would exist
without trade, and therefore
reduces the gains from trade.
Import quotas will have effects
similar to those of tariffs.
A
Summary
 There
are various arguments for
restricting trade: protecting jobs,
defending national security, helping
infant industries, preventing unfair
competition, and responding to
foreign trade restrictions.
 Economists, however, believe that
free trade is usually the better
policy.