Download World price= the price at which a good or service

A.S 3.1
International Trade
International Trade
• Involves buying and selling goods and services
between nations
• Most trade occurs between firms operating in
different countries.
• Some trade is between government agencies
International Trade
• Can you think of exports and imports NZ
sells and buys?
• Which countries do you think most of NZ’s
trade occurs between?
• How much influence do you think NZ has
on the price in the world market?
• http://business.newzealand.com/Economy/
15264.aspx
International Trade
• NZ is a price taker
– A price taker must accept or take the price that is set
in the world market.
• Whether a good is imported or exported
depends on where the World price is, in relation
to the Domestic product.
• World price= the price at which a good or
service is traded on international markets
• Domestic Price= The price at which a good or
service is traded on home market.
Price Taker
• A price taker is a country that is unable to
influence the world price of a commodity.
• NZ is a price taker because our output is
so small in comparison to the rest of the
world a change in domestic demand or
supply will have no effect on the world
price.
Example Milk Production
• How many liters of milk does NZ produce?
• In 2012 - 19.1 billion litres of milk
World Dairy Milk Production
3%
NZ Production
World Production
97%
New Zealand produces only
a very small share of the
world’s milk.
Most milk is consumed in
the country of production –
NZ is an exception where
this is reversed.
Page 7
Confidential to Fonterra Co-operative Group
HORIZONTAL WORLD
SUPPLY CURVE
• New Zealand faces a perfectly elastic
(horizontal) supply curve for imports set at
the world price as the New Zealand
market is so small in relation to the output
from the world
• Therefore the overseas suppliers are able
to supply as much as New Zealand can
buy at the world market price
Exports
• An export is a product consumed in one
country and sold to and consumed in
another country.
• Reasons for exports occurring
• The World price is higher than the domestic price
would be if there was no trade
• The World provides a larger market than the
domestic market.
When these reasons occur, trade results in larger
revenues for firms than if trade didn’t occur.
New Zealand as a exporter
Exports
World
Demand
curve
World Price
QD
NZ
QS
NZ
New Zealand as a exporter
Amount of Exports
Imports
• An import is a product consumed by one country
but produced in another country
• Reasons why imports occur
• The world price is lower than what the domestic
price would be than if there was no trade
• The importing country may not have the resources
to produce the imported product.
• Imports enable the standard of living of a nation to
be greater than it would otherwise be.
New Zealand as an Importer
World supply
curve
World
Price
QDnz
QSnz
Imports
New Zealand as an Importer
Trade and Allocative Efficiency
• Trade improves allocative efficiency
• Shown by increased net welfare benefit
from both exporting and importing
• Protectionist policies result in a loss of
allocative efficiency and dead weight loss
• Tariff is a type of protectionist policy. It is a
tax on an imported good.
Trade and Allocative Efficiency Tariffs
a
c
World Price
(Tariff)
World price
(Zero tariff)
QSnz
QSnz’
QDnz’
QDnz
Trade and Allocative Efficiency - Tariffs
Consumer
surplus
Tariff
Revenue
QSnz’
QDnz’
Imports
QDnz
Trade and Allocative Efficiency - Tariffs
• Tariff on imports
•
•
•
•
•
•
Increase the price
More government revenue
Reduce consumer surplus
Increase producer surplus
Create a dead weight loss
Create allocative inefficiency
• Domestic producers do benefit but consumers and the
economy as a whole suffers a net loss
IMPORT QUOTA
QUOTA
Price
DWL
Sd
CS
Pquota
P
PS
Dd
Quantity
Qquota
An import quota will
increase prices.
Reduce CS
Increase PS
Create allocative inefficiency