principles of microeconomics & principles of macroeconomics: ch.9 first canadian edition...

Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition

International Trade

Chapter 9

Copyright (c) 1999 Harcourt Brace & Company, Canada, Ltd. All rights reserved.


International Trade

How does international trade affect economic well-being?

Who gains and who loses from free trade among countries?


Overview

The Determinants of Trade The Winners and Losers From

Trade The Welfare Effects of a Tariff The Arguments for Restricting

Trade


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 provinces and regions within

a country.


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.


Equilibrium Without TradeDomestic

Supply

Domestic Demand

Quantity

Pri

ceTomato Market


Equilibrium Without TradeDomestic

Supply

Domestic Demand

Quantity

Pri

ceTomato Market

Consumer Surplus

Producer Surplus


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

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 - ExporterDomestic

Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price



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!



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).



Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price



Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price

QuantityExported!



Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price

Net Gainin Surplus!


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 - ImporterDomestic

Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price


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!

It can be determined, graphically, that,Imports will result in a net gain in surplus (welfare).



Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price



Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price

AmountImported!



Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price

Net Gainin Surplus!


Overview



Trade


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.



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.



Trade raises the economic well-being of the nation.

The net change in total surplus is positive.


Overview



Trade


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 TariffDomestic

Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price



Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price

AmountImported



Supply

Domestic Demand

Quantity

Pri

ceTomato Market

World Price

Tariff

}



Supply

Quantity

Pri

ceTomato Market

Tariff}

ReducedConsumption

IncreasedProduction



Supply

Quantity

Pri

ceTomato Market

Tariff}

GovernmentRevenue From

Tariff



Supply

Quantity

Pri

ceTomato Market

Tariff}

Deadweight Losses From

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.– DWL


Overview



Trade


Arguments for Restricting Trade

Arguments Against Free Trade Jobs National Security Infant Industry Unfair-Competition Protection-as-a-Bargaining-Chip


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!


Overview



Trade

principles of microeconomics & principles of macroeconomics: ch.9 first canadian edition...

Documents