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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
