Download Chapter 9 International Trade

Chapter 9
International Trade
The Determinants of Trade
• Without international trade, domestic supply
& domestic demand meet at an equil. price.
• World price = price of a good that prevails in
world market
• If world price < domestic price, you import;
if world price > domestic price, you export
- Both based on comparative advantage
Winners and Losers from Trade
• Assumption: the country is small compared to
world (price takers)
• Example of an Exporting Country
Gains & Losses from Trade
• Exporting country:
1. Domestic producers are better off and
domestic consumers are worse off
2. Trade raises economic well-being of a nation;
rise in total surplus
Gains & Losses of an Importing Country
• World price below domestic price leads to
imports
Winners & Losers
• Importing Country:
1. When importing, domestic consumers are
better off, and domestic producers are worse
off
2. Trade raises economic well-being of a nation
with increased total surplus
• Trade policies expands size of economic pie,
but also creates winners & losers
The Effects of a Tariff
• Tariff - tax on imports
• Tariff raises price of imports above the world
price (by size of tariff) and pushes it closer to
price that would prevail without trade
Effects of a Tariff
• By raising price, it reduces the quantity of
imports and moves the market closer to
equilibrium without trade
• Domestic sellers are better off, domestic
buyers are worse off
• Total surplus has fallen, creating DWL
(because a tariff is a tax)
Effects of an Import Quota
• Limit on the quantity of a good that can be
produced abroad and sold domestically
• Shifts supply curve to right by size of quota
• Leads to exact same result as a tariff except
instead of having gov’t revenue, license
holders get the surplus
Other Benefits of Int’l Trade
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Increased variety of goods
Lower costs through economies of scale
Increased competition
Enhanced flow of ideas
Arguments for Restricting Trade
• Jobs Argument: Trade may eliminate some
jobs in industries that you don’t have
comparative advantage in, however, you
should gain same # of jobs in other industry
• National Security Argument: Does it make you
too reliant on other countries for industries
vital to defend your country?
Arguments for Restricting Trade
• Infant-Industry Argument: Do new industries
need protection? Difficult for gov’t to pick
winners
• Unfair Competition Argument: Free trade is
only ok if everyone plays by same rules
• Bargaining Chip Argument: Can use
restrictions as threat to get other countries to
remove barriers – what if they call our bluff?
Trade Agreements
• Unilateral agreement: remove trade
restrictions on its own
• Multilateral agreement: reduce its trade
restrictions while other countries do the same
(NAFTA, GATT)